Towards A Unified Zakat System

Towardsa unified system ofZakat accounting:the case of theGCC countriesA thesis submitted for the degreeof Doctor of PhilosophyCardiff UniversitybyAbdullah TM Al-UtaibiCardiffBusiness SchoolCardiff University1999

DECLARATIONThis work has not previously been accepted in substance forany degree and is not being concurrently submitted incandidature for any degreeSigned----------- --------(Abdullah Al-Utaibi - student)Date ---ýý-ýLLII-I-q. T --=------STATEMENT 1This thesis is the result of my own investigations, exceptwhere otherwise stated. Other sources are acknowledgedgiving explicit references. A bibliography is appended.Signed---------- - -------(Abdullah Al-Utaibi - student)Date----26-/ IL , -Lci-`1-4-------STATEMENT 2I hereby give consent for my thesis, if accepted, to beavailable for photocopy and for inter-library loan, and forthe title and summary to be made available to outsideorganisations.Signed--- ---- -- -------(Abdullah Al-Utaibi - student)41 /JT9-ýDate----2-6-------1

ACKNOWLEDGEMENTSIN THE NAME OF ALLAH, MOST GRACIOUS, MOST MERCIFULI AM THANKFUL TO ALMIGHTY ALLAH FOR HIS GUIDANCE AND BLESSINGON THE SUCCESS OF MY EFFORTS DURING THE COURSE OF THIS STUDY.Then I would like to express my deepest thanks to a numberof very special individuals and organisations who have madea valuable contribution to this thesis.Firstly, I owe a major debt of gratitude to my supervisorDr. Kamal Naser for his sustained interest, help as well asfriendly encouragement, during my study at the Universityof Cardiff. Secondly, special thanks and gratitude are dueto the director, deputy directors and the head ofAccounting and Finance Section, Cardiff University.My appreciation also goes to Mr. Tawfeek Al-Khyal,Mr. Saleh AlMahmoud, Ibrahim Al-Taweel, Dr. AbdulmajedAbdulgani, Dr. Yahya Younis, Ammar Al-Khshram, AhmmadAl-Sharif and khalid Al-Khateb for the generousencouragement, ideas and advice provided in the preparationof my thesis. Thanks go to all the librarians at thebusinessschool.Thirdly, I would like to emphasis my gratitude to my motherfor her love, prayers and encouragement, and to all my11

family members back home for their support, patience andunderstanding. Very special thanks are due to my belovedfamily here with me in Cardiff, to my wife, Am Abdullaziz,for her sacrifice, patience and understanding; to my sonAbdullaziz and my daughters Ohoud, Wadaha, Basimah, Rubaand Renad for not having had my full attention as well asfor the little ways in which they helped.Finally, to those individuals who have contributed to thisstudy along with whom I have inadvertently omitted mygratitude for their efforts.iii

PAGINATION ERROR INORIGINALTHESIS

AbstractThe possibility of establishing an accounting system forZakat, one of the pillars of the Islamic faith isexamined first by investigating the relevance of thesocio-economic environment of the Gulf Co-operativeCouncil (GCC) countries to introducing a unified systemfor Zakat. Having achieved this general aim, the studyattempts, secondly, to develop an accounting systemserving the different processes of Zakat estimation,calculation, collection and distribution. Employing thefundamental principles of financial accounting, both theaims and objectives were served by designing a researchquestionnaire distributed to four groups of peopleclassified by occupation in four of the six Gulf States.These countries are Bahrain, Kuwait, Saudi Arabia and theUnited Arab Emirates. A sample of 159 respondents wasselected as representative of the societies of the GCCcountries.The results of the analysis revealed that the environmentof the Gulf States is prepared to adopt the relevantarrangements for a Zakat organisation. Based on theexperience of Saudi Arabia, the study reveals theproblematic issues in imposing the duty of Zakat in theother Gulf States. The study also reports that there is areal need to establish an accounting system which willrespond to the multi-functions of Zakat. Respondents wereeager for a distinctive governmental role in organisingthe whole processes, as governments have both thereligious liability and compulsory power to implementZakat legislation. An efficient system of calculating theamount of Zakat payable to the needy requires someadjustment in financial reports and disclosure.V

ContentsPageDeclarationiDedicationiiAcknowledgementsiiiAbstractvContentsviList of tables xiiGlossary of terms xivChapteroneIntroduction1.0 Introduction 11.1 Objectives of the study 41.2 Methodology 5/1.3 Limitations of the study6Organisation of the thesis 71.4ChaptertwoGeneral background to the GCC stat es2.0 Introduction 112.1 The Gulf Co-operation Council (GCC) 122.1.1 Bahrain 132.1.1.1 Economic background 142.1.1.2 Social, Cultural and political background 182.1.2 Kuwait 192.1.2.1 Economic background 202.1.2.2 Social, Cultural and political background 212.1.3 Saudi Arabia (SA) 222.1.3.1 Economic background 242.1.3.2 Social, Cultural and political background 262.1.4 The United Arab Emirates (UAE) 282.1.4.1 Economic background 282.1.4.2 Social, Cultural and political background 312.1.5 Oman 322.1.6 Qatar. -342.2 Aggregate analysis of the economicstructure of GCC countries V 352.3 Co-operation in the GCC states 422.4 An example of Zakat regulation42.5 Summary 50vi

ChapterthreePrinciples of Islamic economics3.0 Introduction 523.1 Islamic dimensions to the study 543.2 Islamic economics 593.3 Principles of unity and brotherhood 633.4 Goals of Islamic economics 643.4.1 Economic wellbeing 653.4.2 Social justice 673.4.3 Economic justice 683.4.4 Equitable distribution of income 703.4.5 Freedom of ownership and activity 723.5 Islamic prohibition of riba 743.5.1 Definition of riba and reasons forits prohibition in Islamic economics 753.5.2 Reasons behind the prohibition of riba 783.5.3 Types of riba 793.6 Islamic economics and ethics 803.7 Islam and economic problems 863.8 Economic intervention by the state 873.9 Islamic economic in practice 923.10 Summary 95Chapte r fourZakat and its position in Islam4.0 Introduction 994.1 Principles of Zakat 1014.1.1 Goals of Zakat 1034.1.1.1 Religious goals 1034.1.1.2 Social goals 1044.1.1.3 Economic goals 1044.2 Beneficiaries of Zakat 1054.3 Entities and wealth subject to Zakat 1084.3.1 Entities 1084.3.2 Wealth 1114.3.2.1 Complete ownership 1114.3.2.2 Actual growth or ability to grow 1144.3.2.3 Ownership of a specified level of wealth 1154.3.2.4 The passage of a year 1164.4 Zakat on capital and its proceeds 1164.4.1 Zakat on animal wealth 116vi'

4.4.1.1 Zakat on pastoral animals 1174.4.1.2 Situations to be observed 1174.4.2 Zakat on cash and near cash assets 1194.4.2.1 Zakat on gold and silver 1194.4.2.2 Zakat on paper money 1204.4.2.3 Zakat on stocks and securities 1224.4.3 Zakat pool of cash and near cash items 1234.4.4 Zakat on agricultural produce 1254.4.4.1 Types of agricultural producesubject to Zakat 1264.4.4.2 Starting point of Zakat duty 1284.4.4.3 Amount of Zakat on agricultural produce 1294.4.5 Zakat on income from labourand professions 1294.4.5.1 Zakat on personal income 1294.4.5.2 Zakat on minerals 1314.4.5.3 Zakat on catches from the sea 1324.5 Authorities responsible for thecollection of Zakat 1334.5.1 Department of Zakat and Income 1344.5.2 Department of General Income 1364.5.3 Authority responsible for thedistribution of Zakat 1364.6 Zakat on assets of trade 1374.6.1 Classification of commercial assets 1404.6.2 Current assets 1414.6.2.1 Cash and debtors 1414.6.2.2 Stock 1424.6.3 Liabilities arising from current assets 1444.6.4 Calculating the Zakat base 145-4.6.4.1Direct method 1454.6.4.2 Indirect method 1464.7 Summary 149u knowmy home phoneChapterfiveResearchmethodology5.0 Introduction 1535.1 Study objectives 1545.2 Research questions 1555.2.1 Zakat payment 1555.2.2 Compulsory nature of Zakat 1565.2.3 Zakat accounting 158VIII

5.2.4 Zakat auditing 1605.2.5 Zakat regulation 1615.2.6 Zakat measurement and disclosure 1625.2.7 Possibility of Zakat harmonisation 1635.2.8 Zakat collection and distribution 1655.2.9 Variations in accounting measurement 1675.2.9.1 Depreciation of fixed assets 1675.2.9.2 Allowances and reserves 1695.2.9.3 Expenditure 1705.2.9.4 Expenditure relating to previous years 1705.2.9.5 Wages, salaries and similar items 1715.2.9.6 End of service awards 1715.2.8.7 Bad debts 1725.2.9.8 Fees of firm's board of directors 1735.2.10 Percentage of Zakat 1755.2.11 Shariah supervisory committee 1765.2.12 Zakat location in the annual report 1775.2.13 Zakat method 1775.2.14 Benefit of Zakat implementation 1795.3 Research methodology 1835.3.1 Questionnaire method 1835.3.2 Design of the questionnaire 1875.3.3 Pilot study 1895.3.4 Sample and questionnaire distribution 1905.3.5 Questionnaire response rate 1945.4 Statistical analysis 1965.4.1 Descriptive statistics 1965.4.2 Statistical tests 1985.5 Summary 200ChaptersixStatistical analysis of the survey study6.0 Introduction 2016.1 Personal characteristics of respondents 2016.1.1 Investments and their values 2066.2 Major results 2086.2.1 Zakat payment on investment returns? 2086.2.2 Factors obstructing the payingof Zakat to the government 2086.2.3 Collection of Zakat 2146.2.4 Who should distribute Zakat? 219ix

6.2.5 The percentage of Zakat thatshould be paid 2226.2.6 Satisfaction with methods usedto calculate Zakat 2266.3 Accounting for Zakat 2296.3.1 The placement of Zakat in annual reports 2296.3.2 Auditing of Zakat 2336.3.3 Zakat regulation 2366.3.4 Variations in Zakat evaluation 2386.4 Proposed recommendations 2416.4.1 Reasons behind the low levelof Zakat collection 2416.4.2 Appointment of Sharia supervisorycommittee 2446.4.3 Potential benefits from ZakatImplementation 2486.4.4 Possibility for and importance of Zakatharmonisation 2526.5 Summary 256ChaptersevenSummaries, conclusion and recommendations7.0 Introduction 2587.1 Summary of the thesis 2587.1.1 Chapter one 2587.1.2 Chapter two 2597.1.3 Chapter three 2597.1.4 Chapter four 2617.1.5 Chapter five 2627.1.6 Chapter six 2627.2 Main conclusions from the study 2667.3 Recommendation for future research 2737.3.1 Reconciling accountancy measurementand Zakat base 2747.3.1.1 Working capital at the beginningof the period 2757.3.1.2 Net profit achieved during the period 2777.3.2 Recommended treatments for someExpenditure 2797.3.2.1 Depreciation of fixed assets 2807.3.2.2 Allowances 2817.3.2.3 Previous year's expenditure 281X

7.3.3 Academic fee expenditure paidto employees 2827.3.4 Amount of Zakat collected by institution 2827.4 Further recommendations 283BibliographyxviAppendix" Arabic/English versions of questionnaire and covering letter;" supervisor's introductory and explanatory letter; and," Zakat Regulations (Department of Zakat and Income).xi

List of tablesPageTable 2.1 Economic indicators of the GCC countries 36Table 2.2 Change of percentage in economic indicators of the GCC countries 37Table 5.1 Questionnaire response rate 194Table 6.1(a) background characteristics of the respondents 203Table 6.1(b) Occupation and experience of the respondents 205Table 6.2 Respondents' investments and their values 206Table 6.3 Zakat payment and its enforcement 208Table 6.4(a) Reasons behind not paying Zakat 210Table 6.4(b) Reasons behind not paying Zakat 212Table 6.5(a) Who should collect Zakat 215Table 6.5(b) Who should collect Zakat 217Table 6.6(a) Who should distribute Zakat? 220Table 6.6(b) Who should distribute Zakat? 221Table 6.7(a) Percentage of Zakat that should be paid 223Table 6.7(b) Percentage of Zakat that should be paid 225Table 6.8(a) Degree of satisfaction with methods used to calculate Zakat 227Table 6.8(b) Degree of satisfaction with methods used to calculate Zakat 228Table 6.9(a) Placement of Zakat in the annual report 230Table 6.9(b) Placement of Zakat in the annual report 232Table 6.10(a) Auditing of Zakat 234X11

Table 6.10(b) Auditing of Zakat 236Table 6.11(a) Zakat regulation 237Table 6.11(b) Zakat regulation 238Table 6.12(a) Variations in Zakat evaluation 239Table 6.12(b) Variations in Zakat evaluation 240Table 6.13(a) Reasons behind low level of Zakat collection 243Table 6.13(b) Reasons behind low level of Zakat collection 244Table 6.14(a) Appoint and pay for Sharia supervisory committee 246Table 6.14(b) Appoint and pay for Sharia supervisory committee 248Table 6.15(a) The potential benefits from Zakat implementation 249Table 6.15(b) The potential benefits from Zakat implementation 251Table 6.16(a)Zakat measurement and disclosure 253Table 6.16(b) Zakat measurement and disclosure 254Table 7.1 A sample of the recommended method 279Xlll

GLOSSARY OF TERMSFai property acquired in war without fighting.Fidth part of fai whose mode of distribution insociety is similar to Zakat.Figh Muslim jurisprudence: it covers all aspects oflife; religious, political, social or economic.Fogaha jurists who give opinion various issues in thelight of the Qu'ran and the Sunnah who have,thereby, led to the development of figh.Ghanimah war booty.Hadith a report on the sayings, deeds or tacit approvalof the Prophet Mohmmad (peace be upon him).Halal anything permitted by the Shariah.Haram anything prohibited by the Shariah.Ijma consensus of the jurists on any issue of fiqhafter the death of the Prophet Mohammad (peacebe upon him).Jahiliah the period in Arabia before the advent of ProphetMohammad (peace be upon him).Khalifah a religious head of a Moslem state.Muamalat affairs of the world.Mudarib the partner who provides entrepreneurship andmanagement in a mudarabah agreement as distinctfrom the one who provides the finance.Nisab a minimum exemption level for the levy of Zakat.Qadi a man whose knowledge of Shariah law enables himto arrive at judgements.Qiyas argument by analogy in legal and theologicalareas.xiv

Qodat plural of Qadi.Shariah refers to the divine guidance as given by theQu'ran and the Sunnah and embodies all aspects ofthe Islamic faith, including beliefs andpractices.Shura consultations, discussions or hearing differencesofopinionbefore any decision is made.Sunnah after the Qu'ran the Sunnah is the mostimportant source of the Islamic faith and refersessentially to the Prophet Mohammad's(peace be upon him) example as indicated by hispractise of faith. The only way to know theSunnah is through the collection of al-hadith.Surah a chapter in the Qu'ran.Tawheed Islamic faith in God (i. e., Allah).Ummah refers to the whole Moslem community,irrespective of colour, race, language ornationality, which carry no weight in Islam.Ushr ten per cent (in some cases five per cent ) ofagricultural produce payable by a Moslem as apartof his religious obligation, like Zakat, mainlyfor the benefit of the poor and the needy.Immam religious scholar.Zakat religious obligation on Moslems to pay apredetermined percentage of the value of theirannual savings, commodities, or properties to theIslamicstate.xiv

ChapteroneIntroduction

ChapteroneIntroduction1.0 IntroductionIslam is more than a religion because it provides acomplete code that applies to all fields of humanexistence. The Qur'an came with the message of Islam,covering everything and organising all aspects of religionand life for the individual and society.Islam is a comprehensive way of life, both religious andsecular: it is a set of religious beliefs and a way ofworship; it is a vast and integrated system of laws; it isa culture and civilisation; it is a code for social andfamily conduct; and, finally, it governs economic andcommercialnorms.One aspect of the impact of adopting the Islamic economicsystem is the achievement of socio-economic justice and theequitable distribution of wealth. The emphasis on moralvalues and, commitment to the human brotherhood providesdistributive justice to all the people in the country.According to Islamic law (Shariah), the goal of justice isachieved as a logical result of the adoption of a free-of-I

interest investment model, where the prohibition ofinterest is vital for ridding the money economy ofinjustice and exploitation as well as making it rational.The Islamic economic system contains some in-builtcorrective measures. This can lead to the elimination ofinequalities in income distribution at the narrow margins.These are in the form of the Zakat, Sadagat and other suchpayments. While other payments that Muslims are asked todo are done voluntarily, it must be emphasised that Zakatis a monetary religious duty on Muslims who are wealthy andare obliged, to pay it according to specific rules. Islambelieves in striking at the root of inequality rather thanmerely alleviating some of the symptoms.Muslim scholars have done their best to discovercircumstantial rules that cover all aspects of Zakat. Theaim has been to secure the obtainment and distribution ofthe right amount of Zakat on different properties. Yetthere have been some areas which need answers regardingpractical issues such as organising, regulating, collectingand distributing the Zäkat, that have emerged in thecontemporary economic environment.2

One important issue, which needs to be investigated, andwhich is the core of this study, is Zakat accounting. Theaim is to establish a framework towards developing basicaccounting principals for Zakat applicable to the financialsystem of Muslim countries. Moreover, dealing with thissubject would impose the necessity to investigate otherassociated issues; religious, economic and managerial. Therecent, so-called Islamic revival dominates almost allIslamic countries. The movement motivates Muslims torediscover their independent identity and religious values.In addition, there has been a changing global commercialenvironment, and real economic challenges have followed thefall of some significant Islamic economies. These changes,together with the decline in oil revenue in Muslim Arabcountries, have stimulated governments to reconsider thestructure of their economies and attempt to reshape them,making them flexible toward these developments.Accordingly, these countries have recently been involved indrawing up plans to combat the new challenges. One aspectof these new policies is the attempt to unify and harmonisethe accounting system applicable to the GCC countries. Thepossibility of applying the Zakat system in these countrieswas examined. In doing so, the Saudi experience in3

egulating Zakat has been employed as the base from whichtodevelop.1.1 Objectives of the studyThe main purpose of the study is to develop a framework fora Zakat accounting system in the GCC countries. Theintention is also to find answers to the followingquestions." What is the most relevant method of Zakat accounting withrespect to both Islamic teaching and the situation offinancial organisations operating in the Gulf?" To what extent could such a method be used throughoutfinancialinstitutions?" Which organisation should collect and distribute Zakat?" Why do some companies try to avoid paying Zakat?" What benefit would governments and economies obtain fromimplementing the Zakat system?" Who should audit Zakat accounting?" To what extent should the harmonisation process, betweenthe GCC countries, take place, and what are thepossibilities available of achieving that process?4

" Is the Saudi Arabian experience suitable and its methodsadequate as a basis from which to generalise arrangementsto the other Gulf States?For the purposes of this study only one kind of Zakat (thatimposed on trade) will be dealt with.1.2 MethodologyThe methodology adopted for the study consists of a currentliterature review and a questionnaire based on itsfindings. Information for the review has been collectedfrom various sources. The literature available on Zakathas, mainly, covered religious matters rather than economicand accounting topics. As a result, the researcher has beenobliged to develop many new ideas, serving the field ofstudy, to cover the partial lack of accounting sources.A self-administered questionnaire was used during thestudy. The qualitative (interview) technique is bestsuited for collecting data when the investigator is dealingwith a survey confined to a local area. In this study,however, the research subject deals with a widegeographical area (four neighbouring countries) It wasnot possible to travel and administer the interviews in5

four countries due to the limitation in time and resources.Thus, although the interview method has its own advantages,it was not used for the reasons mentioned earlier. Thequantitative (questionnaire) method of data collectiondoes, however, ensure a high response rate. The researcheralso has the chance to introduce the research topic andmotivate individuals to participate in the survey. Theself-administered questionnaire is less expensive and lesstime-consuming than interviewing and requires fewer skillsto administer than does the conducting of interviews(Sekaran, 1992: 201). The structure of the tests used, amongother things, were statistical moments or descriptive, andthe non-parametric Kruskal-Wallis test.1.3 Limitations of the studyThe lack ofliteratureon Zakat accounting is the mainlimitation experienced by the researcher. The research has,therefore, been heavily dependent upon the writings ofwidely-known religious scholars in the Islamic world. Evenso, this study is important in terms of it being the firstof its kind to be undertaken so far in the GCC countries.There are, however, certain problems and limitations inthis study that are worth mentioning.6

The study is based on a questionnaire survey and,therefore, the results reflect only the views, experienceand opinions of the respondents as restricted by the choiceof questions used and respondents selected.The bureaucratic systems operating in the GCC countriescreated additional problems as it would take a long time toarrange to visit the departments to be studied in thefieldwork. This study includes only four countries(Bahrain, Kuwait, Saudi Arabia and United Arab Emirates).Qatar and Oman were excluded from this study due to thefactors of cost and time. Future research could expand thesubject groups to include those that prepare annualreports, investments analysts, religious people and bankersand ordinary members of the public. This would provide amore complete look at the issue of Zakat accounting betweentheGCC countries.1.4 Organisation of the thesisThe thesis is structured into eight chapters. Following theintroductory chapter, the second chapter highlights thebackground to the GCC countries; Bahrain, Kuwait, SaudiArabia and the United Arab Emirates, focusing on the Gulf7

Co-operation Council, location, climate, borders,population, socio-political and economic backgrounds.Chapter three reviews the main Islamic principles andhighlights the economic system as prescribed by Islam. Thisis important in order to underline the grounds upon whichZakat accounting is based. This chapter introduces the mainfeatures of the Islamic economic system. Islamic teachingscover spiritual, social, economic and political aspects ofsociety. Inevitably, Islamic economics is based on a setof value systems established by the primary sources ofjurisprudence in Islam. The chapter also reviews somedefinitions in Islamic economics and the Islamic economicsystem. In addition, it discusses the main goals of Islamiceconomics, including some of its main foundations:wellbeing; social and economic justice; and, the equitabledistribution of income. It provides a brief description ofthe main sources of economic thought in Islam. These aresimilar to the sources of jurisprudence since they are bothparts of the Shariah's objectives. The principles of unityand brotherhood are briefly outlined, together with theprohibition of riba in Islam, the associated moral valuesand their relationship with economic realities. It is shownthat the prohibition of riba is the main difference8

distinguishing Islamic economics from conventionaleconomics. Islamic views on economic problems are alsopresented. Finally, a detailed account of the role of thestate and its intervention in the economy in an Islamiccontext is briefly reviewed.Chapter four deals with accounting for Zakat, which is amonetary religious duty on wealthy Muslims. The researchmainly examines various ways that Muslim scholars havesuggested how Zakat should be calculated. Zakat should bedetermined in different situations and a method chosen thatis the most appropriate.Chapter five provides a detailed analysis of the researchquestions and outlines the adopted methodology. Inaddition, a discussion of the advantages and disadvantagesof using a questionnaire are presented together with pilottesting of the questionnaire, sampling procedures andquestionnaire distribution. The statistical tests employedin this study are also discussed.Chapter six presents the findings from the responsesreceived from those responsible for Zakat accounting. Basedon the findings of this study, recommendations are made.9

Chapter seven summarises thefindings of the study andhighlights its main conclusions.10

ChaptertwoGeneralbackgroundtotheGCC states

ChaptertwoGeneral background to the GCC states2.0 IntroductionThe Arabian Gulf is an area which most people associatesolely with the production of oil. This is a gross over-simplification as it ignores its people, its land and itshistory. Although the wealth generated from oil exports hasaffected many aspects of economic life throughout the Gulfregion, it must be remembered, however, that the social lifeis still deeply traditional and remains unchanged. Inaddition to the common historical and socio-culturalbackground, the Gulf countries have similar problems andaspirations. The most important of these are regionalpolitical stability and economic and social development.These two factors appear to be the main reasons behind theestablishment of the Gulf Co-operation Council.This chapter, therefore, reviews the main characteristics ofthe Gulf Co-operation Council (GCC) countries. For eachcountry, a general description is given, followed by briefeconomic details as well as their respective social andcultural backgrounds. An analysis of important economic11

indicators is given and, in the light of this analysis, theimportance of Zakat to the economics of the GCC countries isexplained.2.1 The Gulf Co-operation Council (GCC)Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UnitedArab Emirates formed the Gulf Co-operation Council in 1981as a unified defence, political and economic organisation.The headquarters of the GCC is situated in Riyadh, SaudiArabia. The GCC's Unified Economic Agreement was signed in1983, with the establishment of a single common market asone of its objectives. Several significant GCC-wideregulations have been implemented since then, including theremoval of tariff barriers between member states, subject toa 40% local value-added tax rule, with certain exceptions(Rumaihi, 1986).All GCC member countries have the same rights towards theownership of property as well as towards most businesses inany GCC country. GCC-owned companies have equal access toincentives and facilities, and are accorded the samepreferential treatment in government purchases as locallyowned companies. Many regulations and policies have been, orare being, harmonised in all GCC states (Olfet, 1988).12

in the following section, various features of each of theGCC countries are considered. Only a brief discussion willbe given on Qatar and Oman, as these two countries are notcovered by the present study.2.1.1 BahrainWith a total area of 692 square kilometres, Bahrain consistsof an archipelago of more than 30 islands in the ArabianGulf, 22 kilometres from the eastern coast of Saudi Arabiaand 28 kilometres from the western coast of Qatar (Ministryof Information, 1998)The largest of the six principal islands is also calledBahrain which, translated loosely from the Arabic, means twoseas. It has a total land area of 586 square kilometres andpopulation of 620,000. The oil town of Awali is located inthe centre of the island. Manama, the capital and commercialcentre, is located in the north-east corner of the mainisland and contains more than a quarter of the population.Bahrain is a member of the United Nations, the Arab League,the International Monetary Fund, and the International Bankfor Reconstruction and Development (Bakri, Jali, Ibrahim andGadomi, 1998).13

2.1.1.1 Economic backgroundRelatively small oil reserves and a fast-growing populationprompted Bahrain to pursue an economic diversification andliberalisation programme in the 1970s. As a result, it hasachieved a more balanced economic structure (with strongindustrial and financial services sectors) than other oil-producing countries in the Middle East (Economic Affairs.1998).Earnings from oil were scheduled to rise by 20 percent in1993. This was due to an arrangement with Saudi Arabia toincrease Bahrain's share of the output from the Abu Saf aoilfield, which is in Saudi territorial waters. Oil revenuesrose by 20 percent in 1993 and 12 percent in 1996. In 1997,Bahrain's GDP decreased by 1.2 percent and Per capitaincome was US$8,420 (Economist Intelligence Unit Statistics,1997) .Inflation has been almost non-existent in Bahrain in recentyears, as a result of the government's generallyconservative monetary policy, its generous subsidies forbasic commodities, as well as a slackening of demand in theeconomy(Information Published by Government, 1996).Bahrain was the first country in the southern Gulf region to14

have an oil-based economy. Its oil reserves are small,compared to Gulf standards, and, at the present rate ofextraction, are expected to last only until the end of thedecade. Renewed exploration and government concessions sincethe early 1980s have yielded no new commercially viablesources so far (Rumaihi, 1986).The crude oil and natural gas sector's contribution to GDPhas declined in the last decade, from 17 percent in 1993 to16 percent in 1996, as a result of diversification anddepressed world oil prices. Crude output in 1996 was about40000 b/d(Statistics Published by Ministry of finance, 1996).Bahrain exports the bulk of its oil not as crude but asprocessed petroleum products including jet fuel, gas oil,fuel oil, gasoline, naphtha and kerosene. Together, theseaccount for about 85 percent of the country's totalpetroleum exports. Apart from processing locally producedcrude oil, Bahrain also processes light crude from SaudiArabia (Statistics Published by Ministry of Petroleum, 1996).Bahrain is the base for several heavy industries that arepan-Arab ventures in which the Bahraini Government holds themajority stake. The first to be established, in 1971, wasAluminium Bahrain (Alba). Another example is the Arab15

Shipbuilding and Repair Yard (Asry) which deals with bothlarge tankers and smaller ships (Statistics Published byMinistry of commerce, 1996).The government has given priority to developing theagriculture sector in order to reduce the country'sdependence on imported foodstuffs. Less than 6 percent ofBahrain's total area is considered arable land, however, andmost of this is confined to a narrow strip in the north ofthe main island. The scarcity of water, a hostile climateand the expanding housing and industrial developments arealso constraints to agricultural development (Bakri, et al,1998).The contribution of agriculture to Bahrain's GDP is minimal,amounting to just 2 percent in 1996. In 1997 theagricultural sector satisfied around 15 percent of thedomestic demand (EIU Statistics, 1997).Bahrain owes its success as a primary financial centre inthe Gulf to its key location within the region between Asiaand Europe, its excellent communications system, and itsliberal regulatory environment. Established in 1973, theBahrain Monetary Agency (BMA) functions as the central bank;it is responsible for issuing currency and supervising16

anking and investment institutions in the country. As ofJanuary 1994, Bahrain had 18 commercial banks, twospecialised banks, 51 offshore banking units (OBUS), 22investment banks and 47 representative offices of foreignbanks. The financial institutions sector also includes 21insurance companies and 42 exempt insurance companiestrading offshore. An important event in Bahrain's financialdevelopment was the long-awaited opening of the Bahrainsecurities Exchange in June 1989(Information Published byMinistry of finance, 1997).Bahrain is dependent on imports for the majority of itsneeds, whether for consumer goods, capital goods or rawmaterials. Although Bahrain is an oil-producing country, itsoutput is insufficient to feed the giant Sitra oil refinery,and crude supplies (largely from Saudi Arabia) are thecountry's primary import, accounting for nearly 40%, invalue terms, of total imports. Machinery and transportequipment comprise the largest non-oil import category andrecorded the most rapid growth over the past few years. TheUSA, the UK, Japan and Germany are the four leadingsuppliers of non-oil imports (Information Published byMinistry of Commerce, 1997).17

2.1.1.2 Social, Cultural and political backgroundBahrain is the second smallest country in the GCC and hasthe smallest economy. Although the population is Arab andMuslim, more than half the population is from the Shiitesect. The rulers, however, are Sunnites. Because of thesmall size of the Island, Bahrain society is predominantlynon-tribal as opposed to most other societies in the Gulf.The head of state comes from the ruling family and has aveto over the partly elected parliament.Despite being the poorest GCC country, Bahrain comparesfavourably with other GCC countries when it comes to itshuman development. In 1994, life expectancy was the thirdhighest (72.0 years), infant mortality was third lowest(20%)in the GCC. Bahrain also has the highest adult literacyrate (84%), the highest school enrolment (95%) and thelowest population growth rate (3.7%) (United NationsDevelopment Programme (1997). Overall, Bahrain has thehighest human index value of 0.87 in the GCC (Radwan (1998).Bahrain also relies on a large number of expatriates whorepresent 39% of its population. (Gulf News, 1997). Becauseof the liberal nature of Bahrain society, women's activityrate is the second highest in the GCC, with womenrepresenting 20% of the total workforce (Kapiszewki, 1998).18

2.1.2 KuwaitKuwait is situated at the north-west tip of the ArabianGulf, between Iraq in the north and west, and Saudi Arabiain the south-west. In total the state is 17,818 squarekilometres (7000 square miles) which include several islandsscattered in the Gulf. (Ministry of Information, 1998).The emergence of Kuwait as an oil-rich country hasundoubtedly transformed the nation from a state of poverty,to one of the highest per capita income regions within arelatively short time (per capita income was US$13,867 in1997). This was helped by the fact that Kuwait has a verysmall population, which, according to the census of 1997,had reached 1.81 million (EIU Statistics, 1997).Before the discovery of oil, there was no need for foreignlabour. Following the discovery of oil, the country hasgrown dependent upon expatriate workers for the running ofoil companies. Moreover, the acceleration of economicdevelopments to absorb part of the oil wealth necessitated agrowing demand for expatriates with various skills andtalents in virtually all fields of economic activities aswell as the civil service. This was accentuated by ashortage of national manpower, a high illiteracy rate and arefusal by Kuwaitis to take manual jobs (Rumaihi, 1986).19

2.1.2.1 Economic backgroundThe Kuwaiti oil industry has contributed on average 95percent of GDP to the revenue of Kuwait; 98 percent of thiscomes directly from export of oil and gas. Nevertheless, oilrevenue has decreased by 11 percent in 1997 compared with 6percent in 1994 (EIU Statistics, 1997).Government expenditure also decreased by 6.3 percent in 1996compared with 5 percent in 1994. Climatic conditions and theabsence of flowing water also eliminate the chances forexpanding agricultural production. As a result, the economyis dependent on foreign trade. The ratio of exports to GDPwas more than 90 percent in 1995. This ratio has, however,been volatile, declining in recent years due to thereduction of oil exports (IMF Statistics, 1997).The low domestic aggregate demand due to the small size ofthe domestic market hinders industrial expansion andeliminates the benefits of mass production. Kuwait alsodepends on the rest of the world in many respects,especially in relation to the marketing of oil, which makesit vulnerable to international market forces. Also, thechannelling of surplus funds abroad, due to limited localinvestment opportunities, subjects the economy to externaleconomic pressures and policies (Rumaihi, 1986).20

2.1.2.2 Social, Cultural and political backgroundKuwait is the smallest country in the GCC but is the thirdrichest economy in the Gulf. A large proportion of thepopulation is Shiite, but the ruling family is Sunnite. LikeBahrain, Kuwait is largely liberal. Politically, althoughthe head of state (the Emir) is unelected, the country hasan elected parliament. However, the ruler has the ultimatesay in political affairs.Kuwait, like most GCC countries, is predominantly a tribalsociety. Despite the devastation of Kuwait during and afterthe Gulf War, Kuwait is doing well in terms of its humandevelopment. In 1994, Kuwait had the highest life expectancyin the GCC with 75.2 years, the lowest infant mortality(20%), and the third lowest population growth rate (5.6%).Kuwait also has a very high adult literacy rate (79%)(UNDP,1997). Overall, Kuwait has the second highest human indexvalue of 0.84 in the GCC (Radwan, 1998).Kuwait relies heavily on expatriates. Between 1995 and 1997expatriates represented 84% of the workforce, the secondhighest proportion after the UAE. The women's activity ratein Kuwait is the highest in the GCC, with women representing33% of the total workforce (Kapiszewki, 1998). This suggests21

that Kuwait's society is relatively more liberal than otherGCC countries. Despite its liberalism, however, Kuwait ismostly a tribal society. Tribal links are very important insocialrelations.2.1.3 Saudi Arabia (SA)Saudi Arabia is divided into five main regions. The EasternRegion contains 13 percent of the population and is locatedin the coastal area along the Arabian Gulf, where thecountry's main oil reserves are located. The Central Region(Najd), contains about 25 percent of the total population.Its capital is Riyadh, which is also the capital of theKingdom. The Western Region (Hijaz), accounts forapproximately 34 percent of the population, most of whomlive in the holy cities of Makkah and Medinah, in Jeddah,and in the mountain resort of Taif. The South-west Region(Asir), is inhabited by about 16 percent of the population,almost all live in villages in the mountains and along thecoastal plains. Its main city is Abha. The Northern Regionaccounts for about 12 percent of the population, with arelatively large proportion living in rural areas or in thecities of Tabuk, Hail, Sakakah and Arar. The Rub al Khaliis a wide expanse of barren and unpopulated land to thesouth-east (Ministry of Information, 1998).22

Saudi Arabia is a monarchy, with strong historical linksbetween the government and the Islamic religion. The powersand duties of the King are defined according to the Shariah(Islamic law). The King serves for the good of the people ofSaudi Arabia. Indeed, although supreme authority rests withGod, the enforcement of Shariah law is the responsibility ofthe ruler. The constitution consists only of the Holy Qur'anand the Shariah (Rumaihi, 1986).The Kingdom is divided into 14 governorates, or emirates.The Al-Ahssa emirate is contiguous to the Eastern Region;the emirates of Riyadh and Qassim are in the Central Region;Makkah and Medinah are in the Western Region; Tabuk,Qurayyat, Al Jawf, Hail and the Northern Frontiers are inthe Northern Region; and Asir, Najran, Jizan and Baha are inthe South-West Region. Each emirate is divided into sub-emirates, and urban and rural districts. Municipal districtsand tribal village agencies administer local services (Al-Hogael, 1997).The population census of October 1992, the first censussince 1974, estimated Saudi Arabia's total population atalmost 19.48 million in 1997(IMF Statistics, 1997).23

2.1.3.1 Economic backgroundPossessing the world's largest oil reserves, Saudi Arabiacontributes approximately 10 percent of the world's totaloil production. Saudi Arabia has supported its economicdevelopment with its earnings from oil. Although the oilsector continues to be a dominant factor in economic growth,its contribution to GDP has been steadily declining due tothe volatile world oil market and the recent expansion ofthe non-oil sector. In 1997, GDP in SA had increased by 2percent whilst the per capita income rose to US$7,291(EIUStatistics, 1997).At present, oil prices are currently low and it is estimatedthat persistently weak oil prices will lead to a fall ofmore than 20 percent in oil revenue. Subsequently, thisforces the government to reduce expenditure in order tostabilise debt. Government spending in 1997 was US$59billion, or equivalent to 40% of GDP. This is US$1.9 billionless than in 1996, when actual spending exceeded plannedspending by US$10.40 billion. Furthermore, governmentrevenue budgeted at US$40.26 billion, rose to US$44 billiondue to positive changes in the oil market. Governmentrevenue in 1993 rose marginally, to US$45.01 billion,despite the fall in oil prices (EIU Statistics, l997).24

In addition, Saudi Arabia is also privileged to have vastGas supplies. Associated gas from the Kingdom's oilfields ischannelled into the US$12 billion Master Gas-GatheringSystem (MGS), which is one of the largest engineeringprojects in the world. The MGS comprises gas-gatheringtreatment and transmission plants, and provides the basisfor the development of the Kingdom's petrochemicalindustries.The two major mineral sectors deal with the extraction ofbuilding materials and metals for further processing andindustrial use. By 1993, these two sectors contributed 2percent of non-oil output (Information Published byGovernment, 1996).The government's 1974 industrial strategy was intended toachieve development and diversification of the non-oil basedindustrial sector, alongside substantial private sectorparticipation. Much of the value of these industrialdevelopments has been in the refining and petrochemicalindustries, which accounted for 60 percent of the totalvalue of industrial investment between 1985 and 1992.However, in 1996 the total number of licensed industrialprojects in the SA was still 2,078, with a total investmentof over US$33.33 billion (Ministry of Finance, 1996).25

Accordingly, the SA Monetary Agency (SAMA), as with mostcentral banks, is acting as the monetary agent of thisgovernment. It is responsible for the exchange rate, as wellas monetary control and the control of financialinstitutions in the Kingdom. Indeed, SAMA is seen to be in astrong position to exercise control over inflation. This isbecause money supply growth is determined principally by thelevel of government spending, by private sector creditexpansion, and by the balance of payments deficit or surplus(Ministry of Finance, 1996).At present, the commercial banking sector consists of 12banks, with 1,170 branches throughout the Kingdom and atotal working capital of US$8,051.5 billion; compared withUS$11,374.6 billion in 1996(IMF Statistics, 1997).2.1.3.2 Social, Cultural and political backgroundSaudi Arabia has the largest economy with the largestpopulation in the GCC. Unlike Bahrain and Kuwait, the vastmajority of the population is Sunnite which makes it a morehomogenous population. Another important difference is theextreme conservatism of Saudi society as opposed to theopenness of the Kuwaiti and Bahraini systems. The role ofreligion and tradition in Saudi Arabia is extremely26

important to the everyday life of Saudis. The Shari'ah isstrictly observed by the population and is firmlyimplemented by the government. Religious scholars are highlyregarded and respected. Furthermore, Saudi Arabia is amonarchy, although a consultative council was establishedduring the early 1990s. In addition to conservatism,tribalism is an obvious feature of the Saudi Society. Triballinks and relations are imperative to Saudi people in everyaspect of their life and work.Despite being the largest oil producing country in the GCC,Saudi Arabia does not compare favourably with other GCCcountries in terms of its human development record. Amongthe four countries included in this study, Saudi Arabia hasthe lowest life expectancy (70.3 years), the highest infantmortality rate (27%), the lowest adult literacy (62%) andthe lowest school enrolment ratio (56%) (figures for 1994)(UNDP, 1997). It is not surprising, therefore, to see thatSaudi Arabia has the lowest human development index value(0.77) among the four countries (Radwan, 1998).Because of its large population, Saudi Arabia needsproportionately less expatriate workers than the othercountries. Indeed, in 1997 expatriates represented only30.8% of the total population, which gives Saudi Arabia the27

lowest rate among the four countries included in thisparticular study. However, because of its extremeconservatism, women represent a mere 9% (of whom 20% areexpatriates) of the total workforce (Kapiszewki, 1998).2.1.4 The United Arab Emirates (UAE)The United Arab Emirates (UAE) is a federation of sevenemirates: Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al-Quwain,Ras Al-Khaimah and Fujairah. The total area of the UAE,excluding islands, is about 77,700 square kilometres. AbuDhabi and Dubai are the two largest emirates (Ministry ofInformation, 1998).2.1.4.1 Economic backgroundThe provisional constitution of the UAE (1971) establishedvarious posts and offices. These include the President, theVice President, the Supreme Council, the Federal Council ofMinisters, the Federal National Council, and the Judiciary.The Supreme Council, comprising the hereditary rulers of theseven emirates, is the highest federal authority (Rumaihi,1986).Abu Dhabi's oil wealth has made it the most influential ofthe Emirates. Its ruler is the president of the federation,28

and the city of Abu Dhabi is the centre of federalgovernment activities. Since its establishment as afederation in 1971, the UAE has been a member of the UnitedNations and the Arab League. It is also a member of theInternational Monetary Fund, the Organisation of PetroleumExporting Countries (OPEC) and the Gulf Co-operation Council(GCC) (Bakri, et al, 1998).Official estimates placed the population of the UAE, in1996, at 2.44 million, which is significantly higher thanthe 2.08 million recorded by the 1993 census(StatisticsPublished by Government, 1996).The UAE Government's efforts, since the early 1980s, todiversify the federation's economy and reduce its dependenceon oil, have boosted the manufacturing and service sectors,particularly in Dubai's Jebel Ali Free Zone. They have alsoresulted in a steady decline in the contribution made by theoil sector to the GDP, which decreased from 40 percent in1993 to 35 percent in 1996. Nonetheless, the UAE remains oneof the richest nations in the world. Its per capita GDPmeasured at US$19,095 in 1997(EIU Statistics, 1997).Sustained economic growth will depend, however, on thestrength and stability of oil prices, as well as the29

country's success at economic diversification. Although oilrevenues declined by 4 percent from 1993 to 1994, theyincreased in 1995 by 15 percent (Statistics Published byMinistry of Petroleum, 1997). The UAE has about 11 percentof the world's total oil reserves, making them the thirdlargest in the world after Saudi Arabia's and Iraq's. TheUAE have proven oil reserves of 98.1 billion barrels,equivalent to more than 100 years' supply at the currentrate of extraction (EIU Statistics, 1997).While the UAEIs industrial base has broadened considerablyduring the last decade, much of the industrial sector isstill centred on hydrocarbons. A small home market hampersthe sector's diversification, as do the limitedopportunities for exporting to neighbouring GCC states. Thisis because each has its own industrialisation policy(Statistics Published by Ministry of Commerce, 1997).Similarly, the manufacturing sector comprised 9 percent ofGDP in 1993, compared with 8.5 percent in 1996. The fastest-growing industries are textiles, metal fabrication, food andbeverages, chemicals (particularly fertilisers) and basicmetals (IMF Statistics, 1997).30

2.1.4.2 Social, Cultural and political backgroundThe UAE has the highest per capita income in the Gulf.Socially and culturally, the UAE lies somewhere betweenKuwait/Bahrain and Saudi Arabia, although it is much closerto Saudi Arabia. Like Saudi Arabia, the vast majority of thepopulation is Sunnite. It is strongly tribal, but someemirates are less conservative than Saudi Arabia. Otheremirates, including Abu Dhabi, are almost as conservative asSaudi Arabia. Consequently, although the roles of religionand tradition are important in the UAE, they have lessinfluence in Saudi Arabia.The UAE is ruled by a supreme council with one member (theEmir or Sheikh) from each of the eight emirates. Thepolitical system is based on power sharing, with thepresidency going to the Emir of Abu Dhabi and the primeminister to the Emir of Dubai. However, each Emir hasabsolute power within his own emirate.According to the latest statistics of 1994, the UAE had thehighest life expectancy (75.2 years), the lowest infantmortality (17%), the second highest adult literacy rate(79%), and the second highest school enrolment ratio (82%)(UNDP, 1997). In general, the UAE has the second highesthuman development index value (0.86) in the Gulf (Radwan,31

1998). The UAE also has the fastest growing population inthe Gulf, with a growth rate of 9.8% between 1960 and 1994(UNDP, 1997).The combination of its small population size and fasteconomic growth meant that the UAE needed proportionatelymore expatriate workers than the other GCC countries.Indeed, in 1997 expatriates represented 90.4% of the totalpopulation, which is the highest among the Gulf countries.The conservative nature of the UAE society can be seen fromthe very low percentage of women throughout its workforce(10%) (Kapiszewki, 1998).2.1.5 OmanThe Sultanate of Oman is located in the extreme south-eastcorner of the Arabian Peninsula. It has a total land area of300,000 square kilometres. Most of this is sparselypopulated desert punctuated by dry riverbeds (known locallyas wadis) with occasional green valleys (Ministry ofInformation, 1998). "Oman's population (estimated now to be 2.4 million) stood at2.26 million in 1997. Most of these belong to the strictIbadhi sect, whose principles are followed by thegovernment(Statistics Published by Government, 1997).32

The Omani economy mainly depends on its oil and miningsectors. Although oil's share of GDP declined from 6percent in 1990 to 4 percent in 1996(IMF Statistics, 1997).Although exports of crude oil are the main source ofgovernment revenue, Oman is one of the smallest oilproducers in the Gulf (MOI, 1998).Seventy percent of Omanis rely on agriculture for theirlivelihood, although mostly at a subsistence level. The lackof sufficient water resources are the greatest constraint tothe development of Oman's agricultural potential (Bakri, etal, 1998). Oman has very limited industrial activity, owingto the small domestic market and the lack of trained Omanimanpower. The sector has grown rapidly, however, and,according to the bulletin published by the Gulf Co-operationCouncil in 1997, it expanded at an average annual rate ofnearly 44 percent in real terms between 1990 and 1993. In1996, its contribution to GDP at constant prices reached 4.8percent. There were 2,334 registered companies in thecountry in 1996(IMF Statistics, 1997). The value of importsincreased by 63 percent to US$11,342.13 million in 1996. Thelargest single category of imports (39 percent of totalvalue) continued to be machinery and transport equipment, of33

which road vehicles form the most significant component (IMFStatistics, 1997).2.1.6 QatarThe Qatar Peninsula projects northwards from the much largerArabian Peninsula in the southwestern Arabian Gulf. With atotal area of 11,437 square kilometres, it extends some 160kilometres from north to south and a maximum of 80kilometres from east to west and current estimates put thepopulation at 600,000. The capital of Qatar is Doha(Ministry of Information, 1998).In the west, Dukhan is the focus of the onshore oilindustry, while Umm Bab to its south is the site of a cementplant. There are only a few other permanent settlements inthe country, all of which are located in the peninsula'snorthern half (Bakri, et al, 1998).The country achieved healthy nominal GDP growth rates of 5.1percent in 1993 and 8.5 percent in 1997. Previously,favourable oil earnings have enabled Qatar to achieve a highstandard of living. Although per capita GDP has fallenmarkedly over the' past decade, it is still comparable withthat of developed countries. In 1997, per capita GDP wasaround US$14,903(Statistics Published by Government, 1996).34

In recent years, the government has strived to develop thenon-oil sector in order to reduce the economy's reliance onoil revenue. As a result of falling oil prices, the oilsector's contribution to GDP has been decreasing gradually,from 32 percent in 1993 to 31 percent in 1996. Themanufacturing sector comprised 11 percent of GDP in 1993,1995 and 1996(EIU Statistics, 1997).Adverse geographical conditions severely limit thedevelopment of Qatar's agricultural sector, allowing acontribution of only 1 percent of GDP in 1996 (InformationPublished by Ministry of Commerce, 1996). Qatar remains asmall market for imports. Its main sources for the bulk ofits imports, which consist of industrial machinery andequipment, materials and supplies, consumer goods, and foodand beverages, are Japan, UK and the USA (IMF Statistics,1997).2.2 Aggregate analysis of the economicstructure of GCC countriesTo shed light on changes in economic conditions in the GCCcountries in the last 5 years, economic indicators for eachof these countries were compared and are reported in tables2.1 and 2.2 on the following pages.35

0,'ý-n nn n n N JO JO C\ O I/1 h0I/1r- ty M M Vi M M M4yWvh N O O O Ox 0 0 v v v I TM M14i' V RO N V1 'n 'n k/1v v v v v vVi Il: Il: rý I-:a a C O x 0 ] oN N. n n nCl! N Cl! M M M Mrl:V'-0 0 0 O O 0 0 0 0 O O O O O O M M M M M M M M M M t"'i M M (n MIbf3vM NOÖ IýM V' V NN N ÖO M M MN V OM 'V JOý/1 Vl ýO Oen _nM769 V h M N69 69 69 6969 ffi 69 69MM v? v7 VM L1 JÖf'1p n O VNVýN_Myj 69 69 69N 'V N h ýO VV eV CT V' ýO OýoV n ÖýD VlV' infA FA 69 69 69ýÖM ý: J t? týlhV^v^C1 n JO M O JO Vl MN MM JO nCTtý NnMn'v'Y-Nýfv E13 EA 5q Vi fA 6Ab9-zrvN69QZaZNC0 r-E N 9o N ýoLnE '010 '0 In N ný An'nNCON cl Ic `OMi00a i v i 00Vlp oo M M,'D V Cý 'DVt 0 0 V 7, NVO 69 V) 64 V) yj 6s yj b9 Y3 66 69 69 69ODbhiryMý: JMNMr- nMäpN'O. M MpMOOr- O N- nO00 NC'4N M 1 O00Zh U%ý% ch.Z + 0O5 . 111 V) V) E01)Gn Go) boNOZC)CCVN 7 v'1 vl V n ý`-- G1 'ýV N L1 .-. Oý M Nö n 'U lý l0EyÖEcriOý .G1 O G1 O ýj M.tai'O oo vi 'O'nD ''! 1 'n O N nýO V C% 'DÖ10 Ov1 'VDv0u V [t V 00.= M o0 Mp ^ 'n N n 00 -- ...ýýp M Os 10 O, vi 7, M p Oyd VN N N Mv) yýjO 00fA69_fA_69Gý_ O 769 6900 69121,6969Vl69y'V)M6969696969 69M64en M69M.SN00 V .MQ. QO O 'n Z Z63 690S.. r"ciCE0Ný'nn69 16O '0 O .--ý--ý 10 n rýO V^ Nhý0 0Vý fA ll! i69MO'ONen_69 ViL1MOM_VinV^Mn N N N- OOOc{ N n Nooýco Cln'ON'D cD 'O69 69 69 69 69 69ONO'eý'O'ITV.N M69_69COG1OllM_69MO ^ n ' D NM^ vlM 0 O N O 5ClOVO00nýO J n n N696969 69 69 _69NV70Vý 00'VN0O_6A 69 69hQ5OG 1_69VitW-ÖäO0.V 'V Os O N N M 10 1 V N 00 ýf n: N 1 T In = On-,- V/100 M 00 t Nh h ý/l ,sO V ' ýO G, O --ý O O -ý - N vl ý! 1 Vl 'fl ''J O N M V1O Ö Ö O C. - N Ni N N N N NÖ O O O O -- - -N N N N N- - - - - - - - - - - - - - - -VNGýME--(.a 2VyInt1NOC,ME Vii 00 OV VQ V9 69 69Qr n00 U' N V s"O V O--ý --ý M n M v.ýO O M 00 OO N N Dnýn 'O '! 1 sO VlM_ N V ý. V O /1 O .-+n N1 '""ý M L1 Mr--.-.vlV1 Vl M V ýO 00n69 69 N N N N Nb9nnyj69 69 69 69 69 69 6H 69 A6690 NN ýO N ýO'6'ý00G1ooios.... h0O N vl. NN N '0nN n'M NA00 O F4 ul V1 vi C,.... y M M_d9 69 6A'D5O ýDN ý: J Ny0n ýD G1'O O '/1h- d O O VM M V V'69 b9 69 69v12rJ00 O.NMN_N 01 p N IýON 00 n¢n00 MJ OZ Z N MM OýO Vl910WO_E6 Ni 00MU 9 W 4 69 69 6ntr=Vaý`V^I. C.ý, -ý O V^ 00 M'DG1 n M'cJnNNZ.-'ý.M'n 69 69 69 69 Nc-G1V00NVw'D Z'O V' t'q,nU' 0 V O Q QN O E Cn\ONO CS Z ZVEf3 FA5 a00NHU. N+- - - - - - - - - - - - - -M C/) 0 n M h 10 n M M '/1 J n en 1 '/1 J na Ea c oý Q M Qo cý a/1 I'Dn Ma cCS VCS 1,Cýcý cý a o a s S a o a a c e ý a s L cý ý a a s c E E c, cN aE ýe °Rsm O O' vý Hcý . "O'0ýncýýzU

sv2ýJbbQr N m N n O h CC o O n h O ýO G 'DrQ N n NQ Q h ON 0 0 0O r `D' ri tý b N ý'1 n ý' N N N O O O 0 O0 O N ý'1O0ýDn^hQ Qj v Q z 7-.(f3t/).0tH11M11 IP°'A V1O O Om QY1 N . -. t ý 1Nr- N O N N N NýC` a j-cý a n n N 0 y y n Z 'DC, > .Nl OhO ýn Qt+f Vl Opn QON n O N Q O0n '° w N 00O0 1n v ý'rrO O J O O ra O ý rn ý j , .------------ ----------L7m ýD hh r Ö Qý00 ýOtýlcZ QhnýhQVl7ý/1Qlýl .+NNN Q0, ý QNnQbG-tQrrýDNa'O ý'1 ý/1 rN j 0 0 0 -U'-aNOa Yf Q ¢m ý '? Z^c'AlfNlQZ+00 VlC M QQa n m O O M M m '0 ' r1 a ýD N r O M - m mh a ý0 Q M N N Q n n.. MI N Oý aN N N .. ..t"1 N N r N M tý1 N N N -ý O O O O OQOaaro0_m m n 'ýN m4 of ý,-- -- -- ------ -- - - -brýJ: Q.NYl h O aN Ný .Q ja'ýO O -0, n Na ^OI`hQ N 1 0 Ö...Q Q N^NQ0 NNO O O O Oo0NrQfir [;. ,Zh N NmMn o0 N r..9C ýO e'1 N Q NQGG O ° a tn t+l ý° M'ýý h N N O r eýi tai V1 r t'1riÖOOtýlO 10 h -G N aO j?O "' NmaTNVlnViNvlNVieh V'1 D 10 O O O 0 0aVlr N ý+ QlOm ý QO O f '1 C N N Z 7-CaýbAeýCaývaýA.0bACel4UNNa)mQE*nT 0.ö °n Q -aDaraE a a a a ae[c>6ýQa-aOaraT- - - - - - - - -7 aCOöE o Koö,, tl w ntdO0 N aQaDntý1Q°ra- - - - - -ö a a a a a a a a a a a a a a a V a a a a m a a o: a a a a auädyGVC yvenV°pOG W ý d ` VW'OHaAuý °d° 6 pe ä D as a+0ýt L. p v'nä.ry m d v_yCO6 O CiaV n c n a°'.4 ýl aQmäCVQavýaDananRäcE°.M1aQaýnaýDanaVüOCÖDtdyöäCvn1aQavlaýOaraa. ). fl00000 .2rn yw¢IzC)Co W.

Table 2.1 reveals that Bahrain reported a decrease in oilrevenue, from US$923 million in 1993 to US$847.3 million in1995 (no figures available for 1996 or 1997). SA, Kuwait,Oman, Qatar and the UAE, on the other hand, reportedincreases in oil revenue: from US$28,266.6 million in 1993to US$42,666.6 million in 1997 for SA; from US$8,217.2million in 1993 to US$10,350 million in 1997 for Kuwait;from US$3,463.2 millions in 1993 to US$5,776.36 million in1997 for Oman; from US$2,110 million in 1993 to US$3,133million in 1996 (no figures available for 1997) for Qatar;and, from US$8,247 million in 1993 to US$9,052.8 in 1995 (nofigures available for 1996 or 1997) for the UAE. There wasa general decline in oil revenue towards all these states in1994, except for Oman where it rose from the 1993 figure ofUS$3,463.2 million to US$3,680.7 million in 1994.It is evident from table 2.1 that the GCC countries areheavily dependent on oil revenue. Table 2.2 shows the oilrevenue as a percentage of GDP. All countries, with theexception of Bahrain and Oman, reported a general increasein their oil revenue as a percentage of GDP. Bahrain's oilrevenue (as a percentage of GDP) has declined since 1994 byalmost 18 percent. Oil revenue (as a percentage of GDP) inSaudi Arabia increased by 29 percent in 1996 compared with38

11 percent in 1995. In Kuwait, the oil revenue (as apercentage of GDP) increased from 8 percent in 1993 to 24percent in 1995 and 11 percent in 1996. The UAE registeredan increase from 17 percent in 1993 to 15 percent in 1995.Oman saw a decrease in oil revenue (as a percentage of GDP)from 6 percent in 1994 to 3 percent in 1995.Table 2.1 shows that all countries, with the exception ofKuwait (showing a marginal decline), have reported increasesin their per capita income. Bahrain and Oman, althoughshowing some fluctuations, have remained with relativelyunchanged situations, although Oman (unlike Bahrain, wherethere was an increase) did record a drop in income in 1994.This was despite Oman being alone, amongst the GCC states,in not reducing its oil production in 1994. Bahrain was theonly state to record an increase in per capita income in1994. The per capita income of the UAE showed a slightfluctuation (a reduction in 1994) but since then growth hasbeen recorded, resulting in it being the highest in theregion and one of the highest in the world (US$19,095 in1997). Kuwait also recorded a drop in per capita income in1994. Although Kuwait has experienced a steady increasefrom 1994 to 1997, the highest figure in 1993 (of US$14,511)has not yet been equalled. In this respect Kuwait and the39

UAE are not alike, as the UAE has significantly exceeded its1993 figure. Kuwait is the only member of the GCC not tohave equalled or exceeded its 1993 per capita income. SaudiArabia also presents an anomaly in this group of states inthat it alone registered a drop in per capita income in1997, over its 1996 figure. However, there was stillsufficient growth up to 1997 to exceed the 1993 figure.Qatar has registered a steady and, largely, consistentincrease in per capita income from 1993 (US$12,780) to 1997,when it reached US$14,903, despite it also experiencing adrop in per capita income in 1994.There is a reduction deficit in some countries and anincrease in deficit in others. This is due to an increase innon-oil revenue and reduction of expenditure. The UAE budgetindicates a reduced deficit in 1997 by 3 percent, comparedwith 13.4 percent in 1995. Bahrain announced a deficit of 4percent in 1997 compared with 2.4 percent in 1996 and 3.1percent in 1995. In Saudi the deficit reduced from 10.6percent in 1993 to 3.3 percent in 1996 and 4.5 percent in1997. In Oman and Qatar the deficit reduced from 8.7percent and 8.9 percent in 1995 to 4 percent and 3.4 percentin 1997 respectively. Debt problem is one of the mainfactors influencing confidence in the national economy in40

general. All countries, except Qatar, have experiencedinternal debt. Bahrain registered increased debt from 51.8percent in 1993 to 69.9 percent in 1997. Kuwait reduced itsdebt by 21 percent in 1997, compared to 41.9 percent in1993. Qatar experienced external debt which reached 148.5percent in 1997, the highest debt in all GCC countries. TheUAE reduced its debt by 28.7 percent in 1997, compared to30.8 percent in 1993. Saudi Arabia and Oman are notsignificanthere.In an attempt to limit the effects of the recent decline inoil prices (which hit their budgets badly, in general, andcaused significant increases in their deficits, especiallyin Qatar) the GCC countries would have to adopt new monetaryand fiscal policies which may reduce the loss in oilrevenue. One policy would be to promote alternativeactivities through diversification of the economy, aiming atreducing its dependency on oil revenue. There are someeconomic measures, however, which could produce results muchfaster than the first policy, providing the government withnew sources of income. These policies are identified asfollows. Firstly, attract foreign investment via the stockexchange. Strong stock exchanges are fundamental to economicdevelopment. It would, therefore, be of importance to open41

these markets to foreign investors as the potentialopportunities presented by these stock exchanges appearpromising.Imposing taxes is the most popular financial instrument usedby present day governments. Due to the conservative Moslemnature of Gulf communities, Zakat would, however, be morefavourably received due to religious reasons. In this case(if the Gulf States were to impose Zakat) part of thegovernment's financial burden would be transferred to peoplewho would participate significantly in social securityprogrammes.The public availability of information would allow investorsto make their decisions from a solid basis. Unified Zakatregulation is important in this respect, as it would allowthe public to know, with confidence, that a specifiedpercentage of profit is going to Zakat in all the GulfStates. Also, that same regulation would encourage Mosleminvestors to invest in the GCC stock exchanges.2.3 Co-operation in the GCC StatesThe GCC states have more reason than any other group ofcountries to form a community, if not a union. To start42

with, they all share the same faith, Islam, and they allhave a common historical and racial background. GCCsocieties are also predominantly tribal. Indeed, equallyimportant is the fact that all GCC countries foundthemselves, in the space of a few years, moving from asubsistence economy to a rich economy primarily due to vastoil wealth. Political systems in the region are also similaras they are all ruled by royal or emir families. AlthoughKuwait, Bahrain, Qatar and the UAE have promulgated modernconstitutions, power still remains with the Emir (Rumaihi,1986). GCC countries share weak military capabilities, whichmakes them all quite vulnerable to the threats of morepowerful neighbours such as Iraq and Iran. In the 1960s and1970s all GCC countries felt threatened by expanding Arabnationalism as well as by the acceleration of religiousfundamentalism. Subsequently, internal as well as externalpolitical stability were the main reasons behind theestablishment of the Gulf Co-operation Council (Rumaihi,1986).Since the advent of oil, Per capita GDP increaseddramatically, and vast amounts of money were invested ininfrastructure, health, education and other social sectorsof the GCC countries. In brief, these countries moved from43

among the poorest countries in the world to among therichest in the world. However, all GCC countries suffer froma low population of nationals who are economically active.This amounts to around 20% in all GCC countries(Kapiszewski, 1998).Following the establishment of the GC Council, there wasconsiderable disagreement as to its priorities. Kuwait andUAE wanted to concentrate on economic and social issues,while Oman wanted more co-operation on military issues. Theother members, including Saudi Arabia, merely acted asmediators (Rumaihi, 1986).Although many strategic issues were not dealt with by theCouncil (because of internal disagreement), there are anumber of positive achievements. Among these is the freemovement of trade, the right of establishing business andwork, and the right of residence for GCC citizens. The othermajor step is the economic treaty signed in the 1980s(Kubursi, 1984). By 1995, this treaty had materialised intothefollowing:" Unifying customs duty and establishing a unified customssystem." Allowing companies free movement within GCC countries.44

" Agreement on linking the electricity network in the GCC." Allowing citizens of GCC countries ownership of estate orshares within any GCC country (GCC, General Secretariat,1997).However, there are many key strategic points that have notyet materialised. For example, the harmonisation ofdevelopment plans, oil policy, and a legal framework fortrade and investment in the region are all yet to beimplemented, despite the fact that these were part of theoriginal economic agreement (Kubursi, 1984). Among thepossible reasons behind this problem is the internaldivision and diversity of priorities between GCC members.This gives some insight into the possible difficulties thatcould arise during the attempt to harmonise Zakat accountingin the GCC. The first problem that might be expected wouldbe Oman. Oman's population and rulers are all Ibadhites, athird sect that is closer to the Sunnite than to the Shiite.Thus, as Zakat is closely linked to Shariah, it might wellbe expected Oman to object as it follows a different systemof jurisprudence. This is one of the main reasons why Omanwas not included in this study. The second problem couldcome from Qatar. Although Qatar is mostly Sunnite, thepolitical relations of Qatar and its neighbours have not1 45

een stable. This is especially so with Saudi Arabia andBahrain. Thus, it may not be constructive to include Qatarin a harmonisation project. Therefore, Qatar was alsoexcluded from the present study. The four selectedcountries, SA, Kuwait, Bahrain and the UAE enjoy excellentpolitical relations. Consequently, the success ofharmonisation is more likely within this group of four.Nevertheless, one possible source of difficulty might be thepresence of a large proportion of Shiite population whomight not respond favourably to any Zakat system imposed bythe Sunnites. This is why it is extremely important to carryout an empirical study, in which a representative samplefrom the four countries can be used for assessing theattitude of the population towards Zakat regulation andharmonisation.Another major obstacle that face Zakat harmonisation is thelack of regulation and implementation of zakat in the firstplace by the authorities in all of the GCC countries exceptSaudi Arabia. This issue is further discussed in the nextsection.46

2.4 An example of Zakat regulationAt present, there is no regulation of Zakat or personalincome tax in any of the GCC countries (except in SaudiArabia where Zakat is collected to a limited extent). Theimplementation of Zakat, in the early days of the presentSaudi dynasty, was not regulated by government, as peoplethemselves distributed Zakat to the poor according to theinstructions of Islam. However, although people know thatZakat is one of the five fundamental Islamic principles,many of them, due to their lack of education, were unawareof the principles on which it was levied. People oftendeclared their wealth to the religious leaders for them todecide how much should be given to the needy. They sometimessubmitted this amount to the Qadi (religious judge) of theirtown to spend it, on their behalf, on those who were in need(Jummjom, 1995).According to Yahya (1988) the first steps were taken towardsthe collection of Zakat. This followed the announcement thatlocal administrative boards were to be established in manycities and towns, like Hejaz and Al-Ahssa, to supervise boththe collection and distribution of the Zakat. In Najd, andother parts of the country in which the boards did notexist, the assumption is that people continued distributing47

their Zakat personally, on the advice of local Qodat. In1929, the Public Finance Agency was created and Al-Ahssasubmitted to the authority of this agency. In 1932 theagency was converted into the Ministry of Finance.The Department of Zakat and Income was established andauthorised to supervise the collection of income tax andZakat by the Ministry of Finance decision No. 394, dated14/6/1951. It was originally established in Jeddah, andtransferred to Riyadh in 1970. It now has branches in majorcities of the country. In 1972 it became part of theMinistry of Finance. It is empowered to calculate and levythe Zakat without exception (Al-Sultan, 1997).IIn 1963 the money had to be submitted to the Social SecurityInstitution but, in 1965, this institution was dissolved. Itwas made known that the collected Zakat must be paid intothe account of the general treasury of the government. Also,the Ministry of Finance was ordered to open a separateaccount for this money so that it could be spent along withthe extra funds which the government assigns for socialsecurity purposes. In 1965, the Social Security Departmentwas established, according to Article 20 of the SocialSecurity Regulation. This department was created as part ofthe Ministry of Labour and Social Affairs, with branch48

offices throughout the Saudi Kingdom. These offices obtainedinformation about the poor, from three sources (its ownbranches, the local governor or leading citizens andcharitable organisations in all Saudi cities), thusproviding the department with information about thefinancial condition of the poor (Attiah, 1986).Saudi and GCC citizens and wholly Saudi or GCC-ownedcompanies pay Zakat (a religious tax). According to thestatistics of the Ministry of Commerce, there are 76 Saudicompanies (6 real estate, 14 agricultural, 31 industrial, 6trades and 19 services). Their total capital is US$15,046.7million. Foreign companies, and companies with foreignholdings that have not obtained exemption under the ForeignInvestment Code, pay tax on their net profits or on theportion of net profits attributable to the foreignshareholding. Net profits are calculated by making allowancefor business expenses and depreciation, while capital gainsare also included in gross profits (Farhoud and Ibrahim,1986).Islamic banks and charitable organisations in the GCCcountries collect and distribute Zakat without a governmentmandate. Any person can give his or her Zakat to them withadvice from the donor on how to distribute it.49

2.4 SummaryThis chapter has reviewed the six member countries of theGulf Co-operation Council. The GCC was created with the hopethat the member countries would work together to face thelocal, regional and international challenges facing them.The Gulf region is unstable both politically and in terms ofsecurity. It is, therefore, important that a unifiedapproach be taken to deal with problems common to GCCstates. Additionally, the states have similar economies andmust integrate in order to face the other co-operationalmovements in Europe and America.The information presented here on the six countries revealsseveral common features. The first is that their economiesrely mainly on the oil sector. Industrial and agriculturalactivities are limited developments. The nationalpopulations, overall, are small and the proportion offoreign labour is high in most countries.All the countries are trying to develop and diversify theireconomies. At the same time, the governments of the GCCcountries have injected part of their income from oil intothe economy, in an attempt to increase the standard ofliving. This has resulted in a relatively high per capitaincome compared with the rest of the world. However, the50

future is uncertain. In trying to secure a constant flow ofrevenue, the situation of the GCC countries remainsunstable. Zakat appears to be one of the few financialmediums capable of stabilising the economic conditions intheGCC countries.51

ChapterthreePrinciplesofIslamicEconomics

ChapterthreePrinciples of Islamic Economics3.0 IntroductionThis chapter reviews some background principles to Islamiceconomics in order to underline the grounds upon whichZakat accounting is based. Zakat and riba are among themost important and controversial principles of Islamiceconomics. Any attempt at `Islamisation' of the economywill undoubtedly start with the imposition of Zakat and theprohibition of riba, before implementing other less clear-cut principles such as economic justice and welfare. Itwould make little sense, therefore, to discuss Zakatwithout first discussing and understanding the mainprinciples of Islamic economics.Islam contains a number of directives, which apply to theconduct of economic affairs (Gambling and Abdel-Karim,1991; Chapra, 1992; Kuran, 1992; Afzal-Ur-Rahman, 1980).These directives include moral and ethical norms both inproduction and consumption (fair wages, reasonable pricesand reasonable profits, moderate consumption, abstinencefrom the consumption of illegitimate goods and services).They also include other political and social directives52

(which, under Islam, are all guided by religion) such asGod's unity, obedience to the ruler, consultation, andsocialjustice.Zakat plays a major part in Islamic economic life andshould not be studied in isolation from the body ofreligious belief and economic theory that comprises Islamiceconomics. This chapter can be seen as an introduction,which contributes to a better understanding of Zakat.The chapter introduces the main features of the Islamiceconomic system. Islamic teachings cover spiritual, social,economic and political aspects of society. Inevitably,Islamic economics is based on a value system established bythe primary sources of jurisprudence in Islam. These arediscussed in section 3.1. Section 3.2 reviews somedefinitions of the Islamic economic system. This sectionprovides a brief description of the main sources ofeconomic thought in Islam. These are similar to the sourceof jurisprudence since they are both parts of theobjectives of Shariah. The principles of unity andbrotherhood are briefly outlined in Section 3.3. The maingoals of Islamic economics are discussed in section 3.4.These include some of the main foundations of Islamiceconomics, including wellbeing, social and economic justice53

and equitable distribution of income. The following section(3.5) outlines the prohibition of Riba (usury) in Islam,while section 3.6 discusses the moral values embodied inIslam and their relationship with economic realities. Itwill be shown that this is one of the main differencesdistinguishing Islamic economics from conventionaleconomics. Section 3.7 briefly reviews the Islamic view ofeconomic problems, while section 3.8 is a detailed accountof the role of the state and its intervention in theeconomy in an Islamic context. Section 3.9 presents Islamiceconomics practice. A summary is provided in the lastsection (3.10).3.1 Islamic dimensions to the studyThe word Islam literally means submission and obedience toGod and to His Shariah (religious law). For Muslims, Islamis the religion of Allah, brought to all human kind by HisMessenger Muhammad (pbuh). It is a complete way of lifebased on three basic elements: Tawheed (unity), Shariah(Islamic law), and Akhlaq (ethics).Tawheed is the faith and belief in one unique God and thetranslation of such a belief into action obedient to Hislaw. Thus, commitment to God is one of the most important54

prerequisites for an Islamic economic system. Faith inIslam is not considered to be a mere idea, it is a positionthat must be translated in humans' work and deeds.The Shariah is the law that governs the lives of Muslims.They must aim at implementing it and rejecting all otherlaws. The Qur'an states:And now have We set thee (0 Muhammad) on theclear road of (Our) commandment; so follow it,and follow not the whims of those who know not.(Qur'an, s. XLV, v. 18. )Shariah comprises 'ibadat (rituals) and mu'amalat (earthlyrelationship). While the first relates to the relationshipbetween man and God the second relates to the various formsof person-to-person relationships. Part of the mu'amalatregulates the conduct of Muslim economic activities withinthe Islamic economic system.Akhlaq relates to the moral behaviour and attitude ofMuslims. The Qur'an and the Sunnah provide Muslims with allthey need to know about good and bad modes of conduct (Al-Mawdudi, 1967; Siddiqi, 1989).As far as Islamic economic practices are concerned, themain source of guidance is the Shariah, the principles ofwhich are ordained by Allah and His Messenger. Islamic law55

has two main sources: primary and secondary. The primarysources are the Qur'an and the Sunnah, while the secondarysources are Ijma' (consensus), Qiyas (analogy) and Ijtihad(opinion).In the secular economic systems, human beings alone areresponsible for setting up and designing their economicsystem. Reflection or reason is the main tool available indevising and choosing economic concepts, rules, assumptionsand judgements. In Islam, however, both reason andrevelation enter the process of economic thinking. Ingeneral, it may be said that revelation sets up the mainguidelines and limits of economic thinking while reasonplays a major role in the details (Al-Asal, 1997). As injurisprudence, the sources of Islamic economic-thinking areranked in order of importance as follows (Al-Dib, 1985).1. The Qur'an: is the most important source of Islamic law.It is the word of God revealed to his Prophet Muhammad. TheQur'an outweighs any other source of Islamic jurisprudencebecause it is the word of God and because there is no doubtas to its authenticity.2. The Sunnah: is the second most important source. It isthe written account of the sayings and practices of the56

Prophet Muhammad. It is, however, only accepted as a validsource when the Hadith itself is valid (sahih).These first two sources represent what we call revelation.Reason is, however, also a part of the Islamic sources ofjurisprudence.3. Consensus or Ijma': is the third most important source.It is the unanimous agreement between Muslim scholarsreached in matters not considered by the first two sources.4. Analogy or qiyas: if an opinion is not found in thefirst three sources, then a Muslim jurist (economist) canapply analogy, using similar cases found in the first threesources.5. Ijtihad: is the last resort in which a jurist can usehis own reasoning using whatever tool he can find to reachan opinion. Among these are istihsan (preference), istislah(social utility) and even shar'u man gablana (the pre-Islamic teachings) from which we can infer that a Muslimeconomist can use his own reasoning to reach a decisionusing the available economic theories and systems availableto him. The main condition, however, in Ijtihad is that thedecision should not conflict with the main Islamicprinciples and beliefs (Malik, 1951; Al-Shafi'i, 1987).57

Although various Islamic schools and sects may vary in somedetails, the above mentioned sources are accepted by allMuslims as the main contributors to Islamic jurisprudence.As far as duties are concerned, Shariah rules can bearranged into five main categories.1. Fard or Wajib: is any action that a Muslim (male orfemale) must perform or be punished for not doing so.2. Mandub or Mustahab: is an action that is rewarded ifperformed but a Muslim is not punished if it is not.3. Ja'iz or Mubah: is any permitted action which is neitherrewarded nor punishable.4. Makruh: an action that is disliked but is notpunishable.S. Haram: a prohibited action that is punishable by Allahin the hereafter, in this world or both (Doi, 1984; Al-Qaradawi, 1990).The above laws and guidelines are involved in all aspectsof Muslim lives be it religious, social, economic orpolitical. In economics, however, we find only a limitednumber of opinions and rulings derived from the first three58

sources. For the vast majority of cases, a Muslim economistwill have to rely on qiyas and especially on his/her ownIj tihad.3.2 Islamic economicsThe wellbeing of humans has been an acknowledged objectiveof many societies, doctrines and systems. There have,however, been differing views on many issues, two of themajor ones being: how to achieve such wellbeing; and, thedefinition and limits of wellbeing. Wellbeing has beenclosely linked to satisfaction of the basic needs ofindividuals, elimination of poverty, equal opportunity towork, and just distribution of wealth (Al-Asal, 1997). Thesocialist system, with its centrally planned economy andlimitation on private property, has not been successful infulfilling these goals. Even worse, it has ledthe `socialist' countries into serious economic crisis(Chapra, 1992). It is well known that the capitalisteconomies have performed much better. Despite this,however, the goals of human wellbeing have not beenachieved. It is sufficient to notice the economicinstabilities, imbalances, unemployment, deficits,increasing crime rates, depletion of natural resources andpollution (Al-Asal, 1997). Third world countries, including59

Muslim countries such as Pakistan and Egypt, haveexperienced many problems including poverty, external debt,social unrest, and degrading health and educationstandards.Socialism and capitalism are secular systems and their aimsare materialistic and objective. The Islamic economicsystem differs from these two systems on two counts., -*"Firstly, Islamic economics is based on the Shariah, thebody of Islamic jurisprudence and teachings (Zarqa, 1980).Thus, God, rather than human beings, is the main source fordetermining the fundamental pillars of the system.Secondly, the aims of the Islamic system are not primarilymaterialist. The Islamic version of wellbeing is hayattayyibah (good life) which is based on social and economicjustice as well as the satisfaction of both the spiritualand material needs of human beings (Chapra, 1980).Islam is deeply involved in the economic life of society.Its main goal is to achieve a just and humane socio-economic order free from exploitation and injustice,enabling humans to enjoy a peaceful life on earth and inthe hereafter (Zaman, 1991). There is, however, noconsensus regarding a definition of Islamic economics.60

According to Khan and Mirakhor (1986: 32) Islamic economicsis:... a complete system that prescribes specificpatterns of economic behaviour for allindividuals and society within an Islamic wayoflife.This definition provides a general idea about Islamiceconomics but does not mention the aims of Islamiceconomics such as the distribution of resources (Upadhyaya,1993). It also fails to mention the tools to be used byIslamic economics to achieve such aims. Another definitionis given by Pryor (1985: 197).The Islamic economic system is a theoretical constructof an industrial economy whose members follow theIslamic faith.There is some ambiguity in this definition. Firstly, anIslamic economic system is not limited to an industrialeconomy. The type of economy may vary depending on time andplace. We may well imagine a purely agricultural economy, atourist economy or a mixture of several types. Secondly,not all-economic systems whose members follow the Islamicfaith are Islamic systems. The actual situation of theIslamic world is a direct proof of that (Khan, 1992).Hasanuzzaman (1984: 52) defines Islamic economics as:The knowledge and application of injunctions and rulesof the Shariah that prevent injustice in the acquisitionand disposal of material resources in order to providesatisfaction to human beings and enable them to performtheir obligations to Allah and society.61

This definition also suffers from several shortcomings. Onebeing that it is stated in a somewhat negative fashion. Theaim of Islamic economics is to increase wealth as well asestablish social and economic justice (Chapra, 1992).Although preventing injustice is one of its consequences,it is not an aim in itself (since preventing something doesnot necessarily mean promoting its contrary). Secondly,this definition does not take into account human behaviourand its role in the economic process. Since there is alimited number of injunctions related to economic matters,the main aim of Islamic economics should not be to know andapply those rules and injunctions. Rather, it should set upa theoretical and practical framework, which is compatiblewith these injunctions and rules (Anwar, 1991). Khurshid(1984: 55) states the aims of Islamic economics as:Islamic economics aims at the study of human falahachieved by organising the resources of the earth onthe basis of co-operation and participation.Falah, which literally means success, is an ambiguous termsince its meaning in Islam has both a spiritual andmaterialdimension.In the light of the above discussion, we might attempt todefine Islamic economics as follows.Islamic economics is the study of the means of producingthe optimum set of material and non-material resources anddistributing these resources fairly among the individualsof society within the limits of Shariah.62

The word optimum was chosen because it reflects the balancebetween obtaining maximum resources and taking into accountfactors such as depletion of natural resources andpollution. This definition gives the Muslim economist agreater freedom since the role of Shariah is only to keepthe boundaries, which the economist should not go beyond.For instance, a Muslim economist cannot accept Riba as partof the banking system, however, he/she is free to findalternatives which are not prohibited by Islam such asMurabahah. Similarly, he/she is not allowed to abolishZakat, change the 2.5 percent rate or the recipients ofZakat, but the ruler is allowed to raise other taxes whenthere is a need to do so.3.3 Principles of unity and brotherhoodAs far as relationships are concerned, Islam is based ontwo main principles, the principle of Tawheed and theprinciple of brotherhood. The first principle relates tothe relationship of humans with God and the second relatesto the relationship between humans in light of the firstprinciple.Islam is a unitarian religion. Tawheed means believing inthe unity of God, which means that the most important63

elationship that a human being must have is with Allah,excluding all other similar relationships (Siddiqi, 1989).One consequence of Tawheed is that people are onlyvicegerents of God on earth. Thus, human beings' actionsmust directly or indirectly aim to please God (Choudhury,1986; Al-Habshi, 1987).The other important principle is brotherhood. Thisprinciple includes many aspects of Muslim social, economicand political activities. All activities and relationshipsmust take into account that people are equal and should co-operateas brothers.3.4 Goals of Islamic economicsIslamic economics may be seen as consisting of positivejudgements on details; it is substantially normative sinceit is based on religious values (Anwar, 1991; Al-Sadr,1980; Zarqa, 1980). This is especially true of the basicprinciples of wellbeing, social and economic justice,equitable distribution of income, and freedom of ownershipand economic activity within the context of Shariah. Theseprinciples are also the main goals of Islamic economics(Chapra, 1992).64

3.4.1 Economic wellbeingAs in other economic systems, Islamic economics aims atachieving the wellbeing of human beings. In the capitalistsystem, wellbeing is measured on the basis of individualpreferences (Chapra, 1992), whereas wellbeing, in theIslamic economic system, has a moral and social dimension.Wealth is not an end in itself, it is a means which, ifdistributed with equity, will lead (amongst other things)to wellbeing. In Islam, wellbeing is not related to aquantity or limit. It can be achieved with very little aswell as with a lot. Thus, even in times of hardship or whenthe society is unable to produce enough material resourcesfor its individuals, the equitable distribution of what isavailable combined with the socially agreed moral standardsof Muslims will achieve the wellbeing of Muslims (Chapra,1992). Also, there is no limitation as to the size ofwealth that can be produced or collected by Muslims.Whether large or small, the Qur'an encourages people towork and enjoy God's bounties.Eat and Drink of that which God has provided and actnot corruptly, making mischief in the world.(Qur'an, Chapter 2: 60)O Mankind! Eat of what is lawful and good on earthand follow not the footsteps of the devil.(Qurran, Chapter 2: 168)65

The search for lawful wealth is regarded as and equatedwith acts of worship.When the prayer is ended, then disperse in the landand seek of God's bounty. (Qur'an, Chapter 62: 10)There are many Sayings of the Prophet, which encouragehuman beings to work and master their natural surroundingsfor their benefit (Chapra, 1971). In Islam, therefore,wellbeing is primarily a state of mind, and it can berealised with the minimum of wealth. Indeed Muslims, duringthe time of the Prophet, faced famine and hardship, butbecause of the distribution of whatever was available, andbecause the rich helped the poor, the wellbeing of thecommunity was achieved. Islam does, however, encouragepeople to produce as much wealth as possible providing itis done according to the accepted rules of fairness andhonesty.Islam also aims at relieving the people of hardship(Qur'an, Chapter 4: 28; Chapter 5: 6). Al-Ghazali (1937), thegreat theologian, contended that the aim of the Shariah wasto safeguard people's faith, life, intellect, posterity,and property. In a similar way, Ibn Al-Qayyim (1955)maintains that justice, mercy, welfare, and wisdom are themain tenets of the Shariah. Instead of concentratingexclusively on the material aspects of life, Islamic66

economics attempts to find a balance between the materialand spiritual aspects.3.4.2 Social justiceIn Islam, all people, regardless of their race, class orfinancial position, are equal before God. Islam does notallow national wealth to be concentrated in the hands of aparticular class or section of the community. This isachieved by giving equal opportunity to everyone in societyto seek work or self-employment (Afzal-Ur-Rahman, 1980).The chance to earn a living is given to all individualsunder the Islamic system. The Qur'an, however, does notadvocate equality in poverty and/or riches among people.The natural difference is recognised (Qur'an, Chapter58: 11).The Islamic social welfare system is characterised by thefact that state help, through bayt al-mal, comes as a lastresort. An individual is first encouraged to work. If it isnot possible for him/her to earn sufficiently, then aminimum standard of living is provided to him/her throughhis/her family, friends, community, Zakat and charity. Onlyif these are not sufficient does the state help theindividual. The minimum standard of living may be different67

from place to place and from time to time, depending on thestate's and community's wealth (Al-Asal, 1997). Thus, socialjustice is achieved in Islam through its system of socialand economic solidarity (Zarqa, 1985; Upadhyaya, 1993).3.4.3 Economic justiceAlthough Islamic economics advocates economic justice, itdoes recognise economic inequalities among individuals.Some individuals are bound to be more productive thanothers, while some might be ill or unable to work. Economicjustice is achieved by trying to keep such economicinequalities within reasonable, equitable and naturallimits (Afazal-Ur-Rahman, 1980).Islam also forbids individuals from taking more than is dueto them or withholding what is due to others. The Qur'anstates:Withhold not things justly due to others.(Qur'an, Chapter 26: 183)This general statement applies to all economic agentswhether consumers, producers, distributors, employers oremployees.Exploitation of labour in Islam, in the sense that theworker does not get his/her just wage, is forbidden. The68

minimum just wage is what is sufficient to obtainmoderately good food and clothing (and shelter) without theworker overburdening him/herself (Malik Ibn Anas, 1951).Work in Islam is a religious activity, rewarded by God,just like prayer and fasting. Moreover, just as fasting isa duty on those who can fast, it is the duty for a Muslimto work or seek work if he/she is able to do so. Indeed,the Prophet said that, for a Muslim, pursuing work wasbetter than a whole month of prayer (Al-Albani, h. no. 176).He also praised work and skilled workers on severaloccasions (Al-Albani, h. nos. 1033,1126).The employer-employee relationship is guided by severalethical guidelines. Among these are honesty andrighteousness (Qur'an, chapter 34: 37; chapter 18: 30),excellence (Al-Albani, h. no. 1880), and respect forobligations (Qur'an, chapter 11: 85). Workers should not beasked to do things over their capacities and capabilities(al-Albani, h. no. 1228), neither should their wages bedisproportionate to their effort (Qur'an, chapter 11: 85).Moreover, salaries and wages should not be unduly delayed(Al-Albani, h. no. 1055). Favouritism and inequality ofemployment is strongly opposed by the Prophet (Al-Hafiz,1980).69

Movement towards greater economic and social justice can befacilitated by the application and practice of two mainideas. These are: (i) motivating and enabling theindividual to perform his task with the aim of realisingboth efficiency and equity; and, (ii) reducing theconcentration of wealth, economic and political powers(Chapra, 1971). These ideas, combined with the particularfeatures of Islamic economics (state interventions andmoral values) would result in a system that is radicallydifferent from capitalism or socialism. At the same time itwould have a greater chance of achieving its goal of thewellbeing of its individuals.3.4.4 Equitable distribution of incomeDespite its aims of social and economic justice, Islamiceconomics recognises the possibility of inequality inincome and wealth. This is accepted, but only if it is moreor less proportional to the input (e. g., skill, effort,capital, risk) given by the individual. If the individualpays his/her workers the just price, and does notovercharge customers, inequality of distribution is boundto remain limited. A fair distribution of income isachieved in three ways (Chapra, 1971).70

The first 'is by providing opportunities and encouragementfor everyone to work and by paying each worker a fair wage.The second is the system of Islamic taxation (Zakat andkharaj) where a proportion of wealth is transferreddirectly or indirectly from the rich to the poor. Added tothis is the division of inheritance, in which the poorobtain a share, and religious awqaf (endowments). Other,voluntary means include almsgiving (sadaqat), gifts andother types of assistance for which God rewards Muslims.The third is the system of co-operation and solidarity,including the sharing of natural resources (water, pastureand forests), allocation of public land to the poor forexploitation, and the compulsory help which a Muslim mustgive to close family members (Chapra, 1971; Afzal-Ur-Rahman, 1980).Zakat, which is the main concern of this study, is by farthe most important compulsory tool of redistribution ofincome. It is based on the two principles of Tawheed andbrotherhood and is mentioned in more than twenty places inthe Qur'an (see, for example, Chapter 2: 83, Chapter 9: 103and Chapter 21: 73). Because of its importance, Zakat willbe discussed in greater detail in chapter five.71

3.4.5 Freedom of ownership and activityIn an Islamic society, the individual is free to engage inany economic activity as long as he/she uses honest meansto produce and sell (e. g., pays his/her employees, does notlie about his product). The only limitation imposed is ongoods and services which are forbidden by the Shariah, suchas alcoholic drinks and prostitution. This, however, doesnot mean that Islamic economics embraces the principle oflaissez-faire as the Islamic State plays a strong role incontrolling the economy when needed. Free competition isencouraged in Islam while monopolistic action is stronglyopposed (Siddiqi, 1980). In the case of natural monopoly,however, the state plays a major role to ensure publicinterests are protected.Private property is recognised by Islam, but there iscontroversy as to its limitation (Behdad, 1992). AllMuslims accept, however, that everything on Earth belongstoGod.To Him belongs what is in the Heavens and on Earth andall between them, and all beneath the soil. (Qur'an,Chapter 20: 6)This belief may be used by the government or the caliph(who is the vicegerent of God) to impose some limitation onownership for the good of the whole society if it is seen72

as necessary. In practice, however, private ownership isrecognised and protected by Islam to the point that whoeverdefends his property and dies in the process is considereda martyr (Al-Albani, 1993, h. no. 4172). Nevertheless, thepoor and weak have a share in this property through charity(Qur'an, Chapter 57: 5) and through Zakat.Property in Islam entails rights and duties. Amongst theduties of the owner are the protection and safeguarding ofhis property and its expansion. His/her rights includeenjoyment of the property (except unlawful enjoyment), andthe disposition or transfer of his/her ownership by sellingor donation. The acquirement of property must be by lawfulmeans, not illegal means such as fraud, cheating, gamblingandusury.There is no limit to the size of property owned as long asit is acquired by lawful means. Moreover, in normalcircumstances, no one can deduct anything from the propertyof others except for the Zakat. In exceptional cases,however, the state may impose extra duties or makedeductions from private property. Among these are famineand wars where the state can ask those who have to helpthose who have not (Yahya, 1993; Afzal-Ur-Rahman, 1980).73

Public ownership is also recognised in Islam but this formof public ownership cannot be the result of acquisitionwithout compensation. Although Islam recognises the rightof individuals to own property, there are certain fields inwhich private ownership is considered unnecessary, uselessor injurious to the greater good of society (Afzal-Ur-Rahman, 1980). In such area, the Islamic economic systemfavours public property. This can be inferred from therefusal of the Prophet to grant one person exclusive rightsto a salt mine (Afzal-Ur-Rahman, 1980). This same actionhas led the majority of Muslim jurists to consider allkinds of minerals as state property (Al-Sadr, 1980). Otherstate property includes roads, rivers, bayt al-mal (thetreasury) and government buildings. All state property isto be used for the common good of society, including thehelp of the poor and needy.3.5 Islamic prohibition of Riba (usury)In addition to Zakat Riba is one of the most distinctivefeatures of Islamic economics. The attitude of Islamtowards usury (interest) is a an important practical aspectof an Islamic economic system which should not beneglected. Interest is prohibited by the Islamic Shariah74

and Muslim economists must face the difficulty of findingways of dealing with a world-wide financial and bankingsystem which is predominantly based on interest.3.5.1 Definition of riba and reasons for itsprohibition in Islamic economicsIn Arabic, the noun riba is derived from the verb raba (toincrease).Thus, it means any increase, addition or growth.In Shariah, however, riba has the special meaning of theexcess paid by the borrower to the lender for a loan to theextent of its maturity (Afzal-Ur-Rahman, 1980). Theunanimous view of Muslim jurists is that riba has the samemeaning as interest. Neinhaus (1986) defined riba as apositive predetermined return or guaranteed repayment oncapital, while Cooper (1981) maintains that riba literallymeans to increase.The prohibition of riba, as a practice, is not unique toIslam. It was prohibited by the early Christians, as it wasby the Jews and by Graeco-Roman traditions (Islahi, 1988;Orr, 1989). Great Greek philosophers such as Plato andAristotle stated that interest was contrary to the natureof things and was considered, by them, as bad as homicide(Cooper, 1981). Hammurabi (around 2000 BC) limited interest75

ates in his Code and suggested the alternative of profitand loss sharing (Ahmad, 1991: 13).During the 15th century, however, Christian popes and theircouncils gave in to new practices and accepted thatinterest was justifiable (Kharofa, 1993). In the 19thcentury the Christian Church recognised the lending ofmoney at moderate interest rates (Kharofa, 1993). BothChristians and Jews attempted to find substitutes tointerest but failed to find workable and lasting solutions(Ahmad, 1991: 14).Because riba was widely practised in Arabia, the Qur'an'sprohibition was progressive. Unfortunately, as the Surasand verses in the Qur'an are not chronological, the exactstages of prohibition cannot be determined with certainty.The prohibition of riba in the Qur'an can, however, befound in four places as mentioned by Homoud (1985: 65):The first place: stated in Sura al-Baqarah, verse 39:That which ye give in usury in order that it mayincrease on (other) people's property hath no increasewith Allah; but that which ye give in charity, seekingAllah's countenance, doth increase manifold.This verse was revealed in Mekkah and is probably the firstverse which deals with usury. As is clear from the verse,there is no definite prohibition.76

The second place: stated in Sura al-Nisa', verses 159 and160:Because of the wrongdoing of the Jews, we forbade themgood things which were (before) made lawful unto them,and because of their much hindering from Allah's way.And of their taking usury when they were forbidden,and have their devouring people's wealth by falsepretences. We have prepared for those of them whodisbelieve a painful doom.In this second occurrence, the warning is stronger but isdirected against the Jews. It cannot be said that by thisstage usury was definitely prohibited by the Qur'an,although there a clear warning against it, since whatapplies to Jews should apply to Muslims.The third place: stated in Sura Al 'Imran, verse 130:O ye who believe! Devour not usury, doubling andquadrupling (the sum lent). Observe your duty toAllah, that ye may be successful.This is the first place where the Qur'an unambiguouslyprohibits riba, although the language is still mildcompared to the final place.The fourth place: is the complete and decisive prohibitionof usury in small and large amounts (Ismail, 1990). It isstated in Sura al-Baqarah, verses 278 and 279:O ye who believe! Observe your duty to Allah, and giveup what remaineth (due to you) from usury, if ye are(in truth) believers.And if ye do not, then be warned of war (against you)from Allah and His messenger and if ye repent, then yehave your principal (without interest). Wrong not, andye shall not be wronged.77

These last verses clearly show that all kinds of riba areprohibited by Islam. Moreover, the seriousness ofcommitting such a sin is highlighted by the words then bewarned of war (against you). Indeed, the Prophet cursedanyone linked with riba. In a Hadith narrated by IbnMas'ud, the Prophet:...cursed those who took and paid usury and those whowere witnesses and writers of usurious contracts.(Khorafa, 1993: 24)The warning against riba is very strong and the Qur'andescribes those who take riba by the verse:Those who eat Usury will only rise (from their graves)just like the rise of a person who has been inflictedwith mental instability by the devil2, Verse 275)..... (Qur'an, SuraThe prohibition of riba by Islam should be seen in thegeneral Islamic principle of socio-economic justice wherehumans have the moral obligation not to take advantage ofothers in the human race (Abbasi and Holman, 1990).3.5.2 Reasons behind the prohibition of ribaAlthough the Qur'an does not specifically mention thereasons for the prohibition of riba, it is generallyunderstood that riba is rejected on the grounds of equityand justice (Naser and Moutinho, 1997). They also provide areason for the prohibition of riba.78

It is the poor and the needy who are most often forcedto borrow money, whereas the rich have surplus moneyto save. Interest, therefore penalizes the poor andrewards the rich. (Naser and Mouthino, 1997: 187-203)Riba, therefore, is not equitable to the poor. Anotherreason is that riba is risk-free. While the debtor takesall the risks, the creditor is guaranteed the capital aswell as the return. This does not do justice to theborrower (Naser and Moutinho, 1997). Other reasons advancedinclude the belief that riba represent moral and spiritualevils (love of money and desire to accumulate wealth forits own sake), it spreads hatred and selfishness insociety, and it causes economic hardship for the poor andmiddle class people (Afzal-Ur-Rahman, 1980).3.5.3 Types of ribaIt is difficult to find general agreement, amongst thevarious schools of thought in Islamic jurisprudence, on thedivision of riba. Homoud (1985) provides a lengthydiscussion on the division of usury, both in the writingsof the old schools of thought and in modern writings. Themost widely accepted division distinguishes between twotypes of riba: (i) riba al-fadl (lending interest); and,(ii) riba al-nasiah (selling or exchanging interest). Ribaal-nasiah is the addition which the lender imposes on the79

orrower for the period of time the latter is allowed torepay the loan. The addition or return is fixed in advanceas a reward for waiting. Imam Malik (1951) explains that,during the pre-Islamic period in Arabia, a loan might begranted to a borrower and when the term was due the lenderwould ask the borrower whether he would like to pay orincrease the amount due. If the amount was not paid at theinitially agreed maturity, the debt would be increased inreturn for lengthening the term.Riba al-fadl takes place when goods are exchanged indifferent quantities and/or qualities. Haque (1982: 22)quotes the Hadith from which the prohibition originated.The Prophet said:Gold must be exchanged/sold for gold, like for like,from hand to hand. Any increase in one commodity overthe other is riba.The same Hadith prohibits riba on other commodities such assilver, salt, barley and dates. The prohibition of ribaal-fadl is intended to ensure justice and the removal ofall forms of exploitation through unfair exchanges.3.6 Islamic economics and ethicsSecular economic theories view the individual as aneconomic unit who seeks to maximise his or her benefit and80

utility (Kahf, 1980). There is no concern for what might beright or wrong. Islamic economics differs fundamentally onthis issue as an individual is not assumed to be strippedof his/her belief and knowledge of right and wrong (Kahf,1980). Islamic economists seem to assume that Muslims areto a large extent aware of, and do respect, three mainethical principles (Afzal-Ur-Rahman, 1982; Al-Sadr, 1980;Chapra, 1992). The first is that Muslims work in order toobtain rewards, both during their lifetime and after theirdeath (Qur'an, Chapter 67: 2). The second is that Muslimsare aware of the duties imposed on them by God. It isassumed here that at least the majority of Muslims honoursuch duties. Prayer, payment of Zakat and payment of aworker's salary are amongst these duties. The lastprinciple is that concerning halal and haram (the lawfuland the unlawful) deeds. It is also assumed that themajority of Muslims will abstain from doing unlawful acts.Riba, theft, overpricing, exploiting the weak are allunlawful. Kahf (1973, p. 10) notes that:the time horizon...of an Islamic individual isextended to include the hereafter.Which means that he:... should not limit his behaviour to doing things which hecan collect the benefits resulting from them in this life,he is so oriented that he will do what is good for its sake.In capitalism, individuals are free to consume what they81

choose and what maximises their utility. Producers are alsofree to produce what they want in order to minimise costand maximise profit. The balancing or filtering devicebetween the two is market-determined prices that willdetermine what and how much will be produced and consumed.This, according to Chapra (1992) frustrates the realisationof socio-economic goals because:Unhindered individual preferences, combined with valuefreeadvertising and easy access to credit, createsunlimited wants, while the highly skewed incomedistribution enables the rich to transfer scarceresources for the satisfaction of their unnecessarywants. (Chapra, 1992: 14)This means that while the reliance on price mechanism doesrestore equilibrium between supply and demand, it does thatat the expense of the poor and their wellbeing (Chapra,1992). Replacing this price filtering system by acentralised planned system would worsen the result; it issufficient to see the result in the socialist countries torealise its inconveniences. Islam adopted the pricemechanism but, in addition, introduced a complementarymechanism, which would at least reduce unnecessary claimson resources. This might be called the ethical or moralfilter.All potential claims and preferences of consumers andproducers are passed through this moral filter. Thus, we82

are no longer speaking of unlimited preferences and claimsbecause Muslims have to rescale their preferences inaccordance with Shariah (the law) and the Islamic values oftheirsociety.Islamic rationality implies orientation of action towardsmaximal conformity with Islamic norms (Siddiqi, 1972: 90).It may seem more realistic to say that Muslim rationalityimplies maximising one's utility without conflicting withIslamic teachings. Such a filter, it may be argued, wouldnot work in practice because Muslims would not abide by therules of such a filter. This is not the case, since mostMuslims are aware of halal and haram and do observe themajority of their religious duties. The moral filter issanctioned by divine revelation, in which the vast majorityof Muslims believe strongly. Thus it is reasonable toassume that the majority of Muslims would abide by thisfilter. Moreover, there is the external pressure fromfamily, friends and society to comply. Even if a Muslimwanted to produce or consume something that is deemedunethical, he/she would not be able to because of his/herposition in society and with family and friends.Thus, many potential claims which would have had adverseeffects on equitable distribution and wellbeing are83

eliminated at the outset in Islam. With this reduced set ofclaims and preferences, consumers and producers pass to thesecond filter of price mechanism. The moral filter is ahelping invisible hand to the price mechanism in realisingwellbeing. For example, unlawful goods and activities arenot permitted; extravagance or the use of resources forvain competition are also discouraged (Al-Asal, 1997;Chapra, 1992).In a capitalist society, individuals believe that self-interest induces individuals to maximise efficiency whilemarket forces would constrain this self-interest andsafeguard social interest. Socialists believe that self-interest is ultimately in conflict with social interest andare, therefore, against private ownership (Al-Asal, 1997;Al-Sadr, 1980). The reality is that self-interest is notalways good or always bad. In a free market system, self-interest does promote social interest in most cases. Thereare cases, however, where individuals' self-interestrenders them unwilling to contribute to certain necessarysocial or common projects or services Al-Asal (1997). Thereare other cases where a businessman can get rich byquestionable means or where a consumer would not give uphis claim on resources even though it is badly needed by84

another consumer. There is nothing, in a secular contextthat could prevent such individual-social conflict. Law andregulation are unable to control socially adverse practiceseither because they cannot be made illegal or because theycannot be proven (Chapra, 1992).What is special in Islamic economics is that the self-interest of individuals is extended to the hereafter. Thus,to do good, to sacrifice for others or for society, torefrain from using questionable means, and to contribute toa common project are all seen as self-interest. Self-interest is not only the benefit an individual can obtainin this life. It is also a benefit which a Muslim canobtain after death. A Muslim is, therefore, accountable toGod (whose control is absolute) as well as to earthlyauthorities.Ethics in Islam is, therefore, a powerful incentive forproducers and consumers to work within a fair and justenvironment. It also encourages individuals to give up someof their earthly self-interest for their after-death self-interest in order to promote society and public interests.Islam does not, however, go as far as asking Muslims todeny earthly self-interest (Qur'an, Chapter 7: 32). It isleft up to the individual's conscience to judge which85

aspect of self-interest he or she should take. If it isthought that a small earthly sacrifice would bring morereward after death then he or she would definitely opt forthis latter self-interest.To sum up, in both capitalism and socialism, the absence ofethics leads to powerful individuals (or organisations)manipulating policies and resources to their advantage evenif they contradict social interest (Chapra, 1992, Al-Sadr,1980). If Muslims behave in such a way, they would beacting against their long-term self-interest. For thesecularists, voluntary spending for the good of society byan individual would be absolutely against his self-interest. For a Muslim, spending for the good of hissociety is in his own self-interest (Chapra, 1992).3.7 Islam and economic problemsFor the majority of secular economists, scarcity andinefficient allocation of resources are the major sourcesof economic problems (Lipsey, 1987: 51). In Islam scarcityis not taken as a problem since God has created theuniverse and made full provision of resources (Al-Sadr,1980).And He giveth you of all you asked for, but if you count the favoursof God, never will ye be able to number them... (Qur'an, Chapter 33: 43)86

According to (Al-Asal, 1997) scarcity is rather the resultof the inability of human beings to exploit these resourcesbecause of their limited knowledge or weakness. The basicdifference here is that a conventional economist assumesthat there are not enough resources and thus tries to makethe most of what he has at hand. To a Muslim economist,however, the resources are out there and his major problemis to find ways to reach these unlimited resources (Al-Sadr, 1980).On the second point, inefficient allocation of resources,there does not seem to be any difference between Islamiceconomics and conventional economics. Islam is concernedwith just distribution of resources and wealth and thesecan be interpreted as allocation of resources since whenresources are distributed justly they must be distributedefficiently (Al-Asal, 1997).3.8 Economic intervention by the stateAs mentioned earlier, the Islamic State plays a limited butimportant role in economic affairs. The limitations onintervention are dictated by the degree of growth anddevelopment of the economy as well as by the presence ofavailability of resources and market imperfections. Thus,87

it can be said that an Islamic government only interveneswhen such an intervention is needed and deemed beneficialfor society (Chapra, 1992). The scope of state interventionis, however, broader than that advocated by capitalism. Itincludes control and guidance of economic activity as wellas securing all the functions necessary for the fulfilmentof the needs of the society (Ibn Taymiyyah, n. d. ).Even in a Muslim society, where it is assumed that itsindividuals respect the moral and ethical values, it isstill possible that these individuals are simply unaware ofthe needs of others or the society. In addition, there arealways economic functions that a single, or a group of,individuals cannot perform because such functions areunprofitable or simply because it is not possible for themto mobilise sufficient resources (Chapra 1992). This is whythe role of government has always been significant inIslamic thought (Al-Juwayni, 1979; Al-Mawardi, 1966; Al-Misri, 1989). While Islam recognises individual freedom,the role of the price mechanism and market forces, it doesnot regard them as sacred since the free operation of themarket does not always limit exploitation or protect theweak (Chapra, 1992). It is therefore the duty of the rulerto ensure the aims of the Shariah.88

The function of the state as an agent in economic affairsis facilitated by the obedience which Muslims show to theauthorities. The Qur'an stresses that obedience shouldfirst be given to God, then to His Apostle and, only then,to those in authority amongst Muslims (Qur'an, Chapter4: 59). The practice of government authority is bounded bytwo main limitations (Al-Mawardi, n. d. ). Firstly, theirintervention must be for the benefit of society and,secondly, they must not contravene the rules and principlesof Shariah. Thus, while the orders of God and His Prophetare to be obeyed unconditionally, the orders of thegovernment are only obeyed if they do not contradictIslamic teachings. In addition to abiding by the rules ofthe shariah, the head of government, the Imam or Caliph,must consult with the people, either directly or throughtheir representatives, in matters that concern theirwellbeing (Qur'an, Chapter 3: 159). In this way, the Imambecomes aware of the needs, problems and priorities of hispeople.Islamic economics accepts the laws of supply and demand asthe main factors determining price and quantity in themarket. Both consumers and producers are free to play theirrole in the market. Government intervention comes in89

certain circumstances not. to cancel such freedom but toenhance and support economic freedom without causinginjustice to producers or consumers (Al-Asal, 1997). Forinstance, the government would accept the rejection of asale contract by one party if he was tricked or givenmisleading information (al-Albani, h. nos. 7449,7589). InIslam the state's role is to make sure that information isas good as possible in the market by punishing or removingthose individuals and companies who take advantage of thesellers' or buyers' ignorance, giving them falseinformation to sell to them at higher prices or buy fromthem at lower prices. Moreover, the government mayintervene to restore competition and prevent monopolisticpractices (ihtikar) which the Prophet warned against (Al-Jammal, 1980). Most jurists have agreed, however, thatmonopoly is only forbidden in important and vitalcommodities (Al-Jammal, 1980).The government may encourage certain industries oractivities if they are crucial or beneficial for society.Also, the government can direct and provide incentives forcertain types of work when there is a need for manpower insuch activities (Chapra, 1992). The government may alsointerfere in the job market if it sees that workers need90

protection against exploitation. It can set minimum wagelegislation and draw the necessary legislation thatregulates the workforce market (Chapra, 1992).Islamic economics is against fixing prices. The Prophetrefused to fix prices when the people of Medina complainedabout price increases in the market (Al-Bayhaqi, n. d. ). Thegeneral rule in the relationship between seller and buyeris that of fairness and honesty. In this respect the Qur'anstates:Give full measure and full weight, in justice, andwrong not people in respect of their goods. (Qur'an,Chapter 11: 85)The laws of supply and demand were recognised by Muslimscholars long before Adam Smith. Ibn Khaldun was one ofthem. To him prices are determined by the cost of labour,duties, taxes and other expenses and by the demandrepresented by the desire of the city dwellers to buy (IbnKhaldun, 1979).The policy of market intervention by the state is limitedand restricted in Islam. It is only applied to protect orenhance public interest. The government does not, however,compete directly in the market or hinder the basic role ofsupply and demand. The government acts mainly as aprotection and regulatory body.91

3.9 Islamic Economics in Practice.Although the Islamic economic system may be said to haveexisted during the time of the Prophet (pbuh) and the fourGuided Caliphs, there is some doubt that such a system doesexist on same scale today. Currently, there are at leastfour countries which claim to apply Islamic Shariah. Theseare Iran, Pakistan, Sudan and Saudi Arabia. However, noneof these appear to fully comply with all the precepts ofIslamic economics, judging by the two most obvious featuresof Islamic economics, Zakat and riba.As will be discussed in Chapter 4, Zakat is very importantfor Islamic countries. Therefore, one way of seeing theadherence of these countries to Islamic economics is bylooking at the role of. Zakat in these countries. Currently,only Saudi Arabia has a regulated zakat system, while inthe other three countries zakat is still unregulated. Onthe other hand, riba has been banned in Pakistan, Iran andSudan, but Saudi Arabia continues to be dominated by a ribabased banking system.Although no empirical data is available on Pakistan, Sudanand Iran, the empirical studies in Malaysia suggests thatthe unregulated, traditional system of zakat actuallyaccentuates inequality. This is because the burden falls on92

the paddy-producing agricultural households. This alsoexempts most property owners and wage earners, since noexplicit allowance is made for them in the traditionalsources of Islam (Salleh and Ngah, 1981).In Saudi Arabia, the religious scholars have extended zakatobligations to many types of assets and income. However,zakat evasion remains a common problem in Saudi Arabia andMalaysia (Kuran, 1992) and probably in the other threecountries as well. In any case, zakat does not appear tocontribute much to reducing poverty in these countries.Even in Saudi Arabia, where zakat is regulated andcollected by the zakat department, zakat presents only afraction of the government's expenditure on poverty relief.For the countries that have prohibited riba, thealternatives have not been successful and banks arecarrying out a variety of practices that amount to interestin disguise (Kuran, 1992). The practices of deferred sale(bay' mu'ajjal) and `financing on the basis of normal rateof return of the industry' (Kuran, 1992) are only differentsides of the same coin (interest).On the issue of economic performance, the four countriesare not performing well. Saudi Arabia, despite being themost important exporter of oil, has been in financial93

deficit for many years. Pakistan and Sudan are still amongthe poorest countries in the world. Finally, Iran'seconomy, despite its oil wealth, has been dwindling. Allthese countries suffer from a substantial degree of either(or both) internal or external political instability.The Islamic revival has brought a new cold war between theWest and the Islamic world. Politically, the reaction ofthe West has so far been negative. Many Muslims argue thatthe economic and social problems of the Islamic world arethe result of the negative attitudes of the West towardsIslam. Iran and Sudan are under political and economicsiege, particularly from the USA. And Pakistan has beeninvolved in an expensive nuclear race with India. SaudiArabia, however, enjoys friendly relations with the West,but is threatened by its own Muslim neighbours.Economically, however, there are some positive reactions tothe Islamisation phenomenon. For example, the number ofIslamic banks is growing not only in the Islamic world butalso in the West. Commercial banks in the Arab world areopening Islamic windows, and even Western commercial banks,such as City Bank, are opening Islamic windows.94

3.10 SummaryIn this chapter the main principles and features of Islamiceconomics have been outlined. The main goals of wellbeing,social and economic justice, equitable distribution ofincome, and the freedom of ownership and economic activityhave been discussed. Although God is the ultimate owner,human beings are His vicegerents on Earth. Private propertyis, therefore, recognised and protected by Islam. Publicownership is recognised by Islam where private ownership isnot possible or injurious to the public interest. In thisrespect, rivers, roads and mines are all owned by the state(Afzal-Ur-Rahman, 1980).Freedom of activity is protected in Islam, although anyproduction, sale or consumption must be within theframework of the Shariah. This latter is the source of theIslamic moral values which play the major role in Islamiceconomics. In addition to regulation, moral values guidethe relationship between producers and consumers andbetween employees and employers. Social justice providesfor equal opportunity of work and a minimum subsistencelevel. Social differences are minimised and concentrationof wealth is discouraged and reduced through the impositionof Zakat and inheritance law.95

It was argued that the goal of wellbeing is different inthe Islamic economic system as it has a moral dimension.Minimal material resources could achieve wellbeing as longas there is equity and justice.Islam accepts economic inequality as natural, although thedifferences should be kept within natural limits.Exploitation is forbidden and a minimum fair wage should begiven to workers. Work is seen as a religious duty which isrewarded by God and voluntary unemployment is discouraged.Contrary to secular economics, the primary source ofIslamic economic theory is Divine revelation. Humanreasoning is bounded by revelation and must derive ideasand suggestions that do not conflict with the Shariah.Scarcity of resources is not taken as a main problem inIslamic economics since God has created the world withplenty of resources. The main problems are the inability toexploit these resources and the inefficient allocation ofresources.It was established that there is a need for governmentintervention and action in the market in order to curbinefficiencies, market failures, and exploitation, and inorder to provide incentives and promote activities which96

Fare deemed good for public interest. It was also pointedout that government intervention is limited and does notinvolve competing in the market, fixing prices orcancelling the market price mechanism. Regulations set bythe state must, however, be in conformity with the Shariah.The Islamic economic system is a realistic system, whichrecognises the difficulties surrounding the aim of thewellbeing of people. It does not rely solely on mechanismsor magic hands to solve economic problems. Neither does itrely completely on ethics and moral values to establishequitable distribution of income. While accepting theimportance of economic mechanisms, it does not belittle thepotential of belief in motivating human beings to behave ina responsible manner. Despite not being acknowledged, normsand beliefs continue to exist under capitalism andsocialism. Their role has, however, been minimal as thedegree of motivation has either been small or has notaffected the majority of people.The institution of Zakat and prohibition of riba are notthe only features of Islamic economics, as many mightbelieve. Although these are important parts of Islamiceconomics, there are other principles that are fundamental.Among these are the Islamic moral values and their role in97

economic activities, social and economic justice, property,and intervention of the state. Thus, in attempting toestablish an Islamic economic system it would beunproductive to limit the establishment to Zakat and riba.Islamic economics should be implemented as a wholeprogramme and its components should not be applied in anisolated manner if they are to be successful.Nevertheless, the issues of Zakat and riba are more easilyunderstood and implemented, compared to other issues suchas economic justice. Two Islamic economists may understandsocial justice differently, but all Muslims agree on Zakatand the vast majority agree on riba. They are alsoimportant because, in cases where all-Islamic principlescould not be applied, these two seem the first and bestcandidates to start with. The abolition of riba andimposition of Zakat are useful in that they eliminateinjustice and encourage co-operation and brotherhood.Riba was discussed briefly in this chapter. However, sinceZakat is the main subject of the present study, it will bedealt with in more depth in Chapter 4.98

ChapterourZakatanditspositioninIslam

ChapterfourZakat and its position in Islam4.0 IntroductionLike the other four pillars of Islam, Zakat has it's ownlegislation. This legislation is cited in the Qur'an. Manyverses deal with the philosophy of Zakat; why it is imposedon Muslims and the amounts of Zakat levied on differentforms of wealth. Also, the Qur'an describes thebeneficiaries to whom Zakat must paid. All these basicshave common consensus among religious scholars. Zakat is,however, a field in which scholars have, over thecenturies, added a great deal of rules to explain how toconsider the emerging new forms of wealth with regard tothe entitlement to duty of Zakat. These rules (Fatawa) havenot contradicted the basics. Instead, they have developedthe thought of Zakat in terms of expanding the Zakat baseto include new forms of wealth which were the outcome ofdevelopment of economic systems. There are basically fourschools of Islamic jurisprudence (the Shia sect is notconsidered in this study). These are the Maliki, Shafi-i,Hanafi and Hanbali. The Hanbali School was founded by ImamAhmad Ibn Hanbal and is followed mostly in the Arab Gulf99

egion. Most of the rulings (fatawa) used in this studywill be based on Hanbali scholars. However, the fourschools differ from each other only in minor details. Forexample, there is a difference of opinion among schools onwhether Zakat on paper money should the nominal or marketvalue and the gold should be zakatable if not use as kindof trade. This chapter, therefore aims to clarify theconcept of Zakat and its philosophy, explain its types andamounts, and outline ways of collection and distribution.With regard to the topic of this research, this chapterfocuses on Zakat trade activities. Emphasis on differentaccounting methods of Zakat estimation is one of the mainorientations of this chapter.Besides the introduction, the chapter contains sevensections. Section two introduces Zakat principles and theirimportance to Islamic societies. In section three,beneficiaries of Zakat are discussed. Section four dealsdirectly with the characteristics of wealth subject toZakat. Zakat on Capital and its proceeds, Zakat on farming,Zakat on personal and professional income are all discussedin section five. Zakat on trade, as a main subject for thisstudy, is addressed in section six. In this section,methods used to account for zakat are investigated.100

Although these methods are currently in use, consensus ontheir use has not been achieved and none of them standsalone as a universally acceptable method. In section seven,the issue of who should be responsible for collecting anddistributing Zakat is addressed.4.1 Principles of ZakatZakat in the Arabic language means increment, growth,and/or purification of the soul and wealth. Zakat is thethird basic pillar of the Islamic faith, which is built onfive main pillars. The five pillars of Islam which formthe basic framework of the Islamic faith, are:acceptance of the unity of Allah;prayers to Allah five times each day;Zakat;fasting for the month of Ramadan each year, starting at 15years old; and,the pilgrimage to Makkah once in a lifetime and when theindividual is able.Among these five principles, Zakat is the one that formsthe basis of an Islamic economy. Zakat became a compulsoryreligious duty in the second year of Hejrah, i. e., 580 AD.101

The establishment of this duty is conveyed in many placesin the holy Qur'an. According to Yahya (1986), Zakat hasbeen mentioned 59 times in the holy Qur'an. The followingare examples of verses referred to Zakat.And be steadfast in prayer: Give Zakat, and bow down yourheads with those who bow down (in worship).(Qur'an, chapter 2: 43)Of their wealth take alms (Zakat) that so the mightiestpurify and sanctify them; and pray on their behalf.(Qur'an, chapter 9: 103)Eat of their fruit in their season, but render the duesthat are proper on the day that the harvest is gathered.(Qur'an, chapter 6: 141)Various verses in the Qur'an came to establish the duty ofthe Zakat and the teachings of the Prophet (peace be uponhim) explained its roles and principles. Tawrat and theBible have both urged the faithful to give alms (donatedcharity) which is a form of Zakat (Yahya, 1986). In fact,the Qur'an has mentioned that prophet Ismail, Isaac, Jacob,(all of those who preceded Islam) were all ordered to payZakat. Jesus on the other hand has been quoted in holyQur'an as saying:I am indeed a servant of Allah; He has given me Revelationand made me a prophet, and He hath made me blessedwheresoever I be, and hath enjoined on me prayer and Zakatas long as I live. (Qur'an, chapter 19: 30 and 31)102

4.1.1 Goals of ZakatMany Muslim scholars, such as Imam Ahmed, have identifiedthree main goals of Zakat. These goals are religious,social, and economic.4.1.1.1 Religious goalsThe purpose of life, according to Islamic principles, isthe worship of Allah by doing what he asked us to do andrefraining from what he has cautioned us from doing. Allahhas ordered Muslims to confirm that there is only one God,to perform five daily prayers and give yearly alms onwealth. Prayer and fasting are meant to give thanks toAllah for the gift of the body. On the other hand, Zakat isto give thanks for the gift of money (Al-Tayar, 1987). Theperformance of Zakat means, therefore, that the Muslim hasobeyed Allah, which gives the individual the spiritualsatisfaction he/she needs (Sabiq, 1985). Some scholars,like Imam Ahmad, have mentioned that Zakat helpsindividuals to overcome greed which is considered by manyas an unwelcome trait (Al-Fanjari, 1982). In this respect,the Qur'an states:If ye had control of the treasuries of the mercy of myLord, behold, ye will keep them back; for fear of spendingthem: for man is (ever) niggardly. (Qur'an, chapter17: 100).103

Therefore, the payment of Zakat is an act, which helpsMuslims to purify their souls from such weaknesses andmakes them feel better.4.1.1.2 Social goalsBy asking able Muslims to perform Zakat, Allah has giventhe poor an established right in the wealth of the rich.This relieves the Muslim, who happens to be poor, from theonerous task of asking for charity, with the humiliationthat this brings. The rich, on the other hand, are given anopportunity to feel part of the entire social environment,when giving Zakat, and are not isolated in their owneconomic group. Zakat payers may, thus, feel that they arecontributing to the shared human environment. Performanceof Zakat acts as a mechanism for the distribution ofwealth, which helps in closing the gap between the poor andthe rich (Kahf, 1989).4.1.1.3 Economic goalsThere are two obvious economic goals for Zakat (Kahf, 1989;Qureshi, 1978).The redistribution of wealth within the society. Thisincreases the purchasing power of the poor, which enables104

them to contribute positively to the economic cycle thataids economic growth and the wellbeing of others.Zakat is levied on many types of wealth including money inthe bank. If this money stays for a long time without beinginvested, Zakat will lead to its depletion.. By paying Zakateach year, a person will hopefully be motivated to investthe idle money. Zakat, therefore, encourages investment,which adds to economic activity.4.2 Beneficiaries of ZakatThe beneficiaries of Zakat are described in a verse of theHoly Qur'an as follows.Alms (Zakat) are for the poor, the needy, and thoseemployed to administer the (funds). For those whosehearts have been (recently) reconciled (to Truth), forthose in bondage and in debt, in the cause of God andfor the wayfarer: (this is it) ordained by Allah asAllah is full of knowledge and wisdom. (Qur'an, chapter19: 30 and 31).People who cannot benefit from Zakat include rich people,healthy and strong people who can find jobs and earn aliving, atheists, non-Muslims, and the sons, parents andwives of those who give Zakat. Others included the prophetand his relatives; whether close or extended members of hisfamily (Sabiq, 1985). As mentioned in the above verse, the105

people that can receive Zakat fall into eight categories.They include the poor and needy, miserable people, peopleworking on the collection and administration of Zakatproceeds, people hesitant in their belief and those who canbe converted to Islam, slaves who wish to buy theirfreedom, heavily indebted people, fighters for the cause ofIslam, and wayfarers (travellers) who are far away fromtheir homes and monetary resources (Al-Qaradawi, 1986).The first and second categories include the poor and needy.Many Muslim scholars, like Imam Ahmad, have defined thepoor as people with hardly any wealth, and the miserable aspeople who can manage some of their needs but cannot findenough for the whole year (Abbas, 1988).The third category are people who are working to collectZakat from those who are paying Zakat and distributing theproceeds to those in need. These people should be paidsalaries, i. e., benefits equal to the work received fromthem.The fourth type of people are potential Muslims or thoseMuslims that have been recently converted to Islam andtheir belief is not yet settled (Sabiq, 1985; Al-Qaradawi,1986). In recent history, benefits to this category have106

een distributed to non-profit Muslim organisations workingin Muslim and non-Muslim countries (Al-Tayar, 1987). Theseorganisations which have been provided with funding forprojects such as schools, hospitals and food distribution.The fifth type of beneficiary are slaves who wish to buytheir freedom (Sabiq, 1985; Al-Qaradawi, 1986). It is wellknown that slavery was part of every day life before Islam.When Islam came, however, it set up rules to discourageslavery and encourage the freeing of slaves. As slavery isnow extinct, many Muslim scholars, like Imam Ahmad, havesuggested that proceeds to such beneficiaries should bemade available to other purposes (Al-Sultan, 1997).The sixth type of beneficiaries are those who are deeplyindebted. The word in Arabic calls for specific types ofdebts such as debt that arises from the fulfilment ofspecial needs. These needs include marriage, buildingone's own house, debt arising from good that has beenextended to the benefit of the community, ill health, andeducation (Sabiq, 1985; Al-Qaradawi, 1986).The seventh type of beneficiaries is those who are fightingin order to defend Islamic causes. The Arabic word in thecause of Allah carries many meanings, which include the107

uilding of schools, roads, bridges, and many other typesof public projects that can benefit fellow Muslims (Sabiq,1985; Al-Qaradawi, 1986).The eighth and final type of beneficiaries is a wayfarer(traveller) who does not have enough money to get backhome. These people are to be given enough money toguarantee safe passage to their homes and financialresources (Sabiq, 1985; Al-Qaradawi, 1986).4.3 Entities and wealth subject to ZakatHaving defined Zakat and identified the main beneficiariesof its proceeds, attention is now turned to those whoshould pay Zakat and the characteristics of wealth subjecttoZakat.4.3.1 EntitiesZakat is a duty that is only obligatory on persons. It isalso an obligation on entities, in that certain entitiesrepresent the interests of real persons. According to allMuslim jurisprudence, Zakat is an obligation on Muslims whoare free, adult (of a certain age) and possess a specifiedlevel of wealth (Sato, 1987). By a consensus of the four108

sectors of the Sunni Islamic sect, Zakat is not anobligation on non-Muslims (Sabiq, 1985). The majority ofjurists do consider, however, that the obligation extendsto both the insane and non-adult Muslims (Sabiq, 1985;Al-Qaradawi, 1986). This consideration is based on the viewthat Zakat is an obligation on wealth and not onindividuals. The argument of those who drop the obligationon the wealth of the non-adult and the insane is based onthe premise that all religious actions should be precededby intention and the intention of those people istemporarily suspended (Al-Qaradawi, 1986). It seems thatthe first groups' argument is stronger since it issupported by the Prophet's saying that:Those who become responsible for an orphan should trade onhis behalf so that Zakat will not eat it off. (Al-Qaradawi,1986, cited in Sabiq, 1985: 375)In the case of partnerships and corporations, the issue iswhether the partnership and the corporation should payZakat on behalf of the shareholders or leave that toindividual shareholders who should assess, at the end ofthe year, the market value of their shares and theirportion of the profits and pay Zakat accordingly. In thecase of partnerships, it is easy to separate the accountsof each partner, therefore it should be left to them to109

decide whether the entity should pay their portion of Zakator not (Al-Sultan, 1986). In the case of a corporation,however, it is difficult, if not impossible, for individualshareholders to know how much Zakat they should pay. Partof the difficulty is that Zakat is assessed againstrealised and unrealised profits of the corporation, and itwill be difficult, given current accounting practices, forshareholders to know how much profit is unrealised.According to some Muslim jurists, like Imam Ahmad, whendifferent amounts of wealth are combined, Zakat should bepaid on the total without giving consideration to thematter of whether the wealth of some of the shareholders isless than the specified minimum. According to this view,the new entity is an obligatory party and not theindividuals who make up its owners (Al-Sultan, 1986). Itseems the assessment and collection of Zakat will be mucheasier if this view is adopted. Muslim countries should,therefore, obligate firms to calculate Zakat on the portionof the firm owned by Muslims and pay it to the government.This view has been adopted by the Zakat authorities inSaudi Arabia, and it, therefore, obliges all publiccompanies to calculate and pay Zakat each year (Al-Sultan,1986).110

4.3.2 WealthThe teachings of the prophet defined wealth as ownership ofanimals, agricultural products, gold, silver, tradingassets, and minerals. Muslim jurists, such as Al-Qaradawi(1986), have all agreed that Zakat is an obligation on notonly the types of wealth known during the Prophet's time,and the early stages of the Islamic religion, but theobligation also extends to all types of wealth currentlyknown (Kahf, 1989). Zakat is, therefore, a duty on papermoney, securities, and all minerals from land and sea. Thecharacteristics of wealth, on which Zakat is an obligation,can be summarised as follows (Al-Tayar, 1987; Afzal-Ur-Rahman, 1980; Sato, 1987).4.3.2.1 Complete ownershipThis is defined as any wealth that is actually in thepossession of its owner. This is different from legalownership since a lender, for instance, does not possessthe money he/she lent despite the fact that he or shelegally owns it. Also, there is no Zakat on public money,which has no distinct owner. The same can also be saidabout wealth that is robbed or lost, in that its owner doesnot have to pay Zakat since he/she has no control over it.111

Borrowed wealth (money) is considered wealth that is in thepossession of its owner as long as the loan is to an ableparty and the owner can recover that wealth (Al-Qaradawi,1986).With regard to Zakat on wealth when its owner is indebted;should this debt be subtracted from the total debt inarriving at the Zakat base or not. Muslim scholars, likeImam Ahmad, distinguish between two types of wealth:visible and invisible. They define visible wealth as thewealth that cannot be hidden, such as animals andagriculture wealth. Invisible wealth is wealth that is notapparent to everybody. They include easily hidden or notreally apparent wealth, such as trading activities andownership of silver and gold (Al-Tayar, 1987). Mostjurisprudence experts, like Imam Ahmad, say that debtshould be subtracted from invisible wealth when calculatingthe Zakat base (which is the total net amount that resultsfrom pooling together all the individual forms of wealth).At the same time, the debt should not be subtracted fromvisible wealth. They base their judgement on theirconsidered belief that the hearts of the poor arepassionate toward visible wealth, and that Zakat wascollected from this type of wealth during the early days of112

Islam without regard to any debt on this type of wealth.Most contemporary scholars, however, disagree with drawingsuch distinctions and say that justice and equality aremore important than any unreal distinctions between wealthtypes. Debt should, therefore, be subtracted whencalculating the Zakat base in relation to all types ofwealth (Shattah, 1977). This can be expressedmathematically as follows.w= v+ Iv .......(1)Where:W= WealthV= VisibleIV = Invisible not subject to ZakatV= [An + Ag + Qc + SC + Ta + Mn]......(2)Where:An = outcome of animals,Ag = outcome of agriculture products,QC = outcome of gold,SC = outcome of silver,Ta = outcome of trading assets,Mn = outcome of minerals.Combining equation 1 with equation 2 results in equation 3.Zv = X0 (Anq + Agq + Gq + Sq + Taq + Mnq) + IV.......(3)Where:Zv the amount of Zakat on visible wealthXo= the coefficient of Zakat as percentages. It113

varies according to the kind of visible wealth.Note: Zakat levied on all items if the outcome reached theZakatbase.Taking into consideration possible borrowing, Zakat onwealth can be expressed mathematically as follows:Zakat is paid on the accumulation of wealth:W= Wn1- W0......(ýi)Where:ÄW = accumulation in wealthWno = wealth at the begins of the year.Wnl = wealth at the end of current yearn= period of time; the length of the period is 354.4.3.2.2 Actual growth or ability to growAll Muslim jurists have agreed that Zakat should apply onlyto wealth that is growing or is able to grow (Farhud andIbrahim, 1986). Wealth that Zakat can be taken from can begrowing by natural production, as in the case of animalwealth, or by turnover as in trading activities. Thewealth can have the ability to grow as with gold, silver,and paper money, if invested (Joan, 1999). Personalproperty, therefore, such as cars used for personaltransportation, houses used for family living, furniture,clothing, and instruments of labour are all not subject to114

4.3.2.4 The passage of a yearThe passage of an Islamic year (354 days) since wealthreached the minimum obligatory level is a condition for thecollection of Zakat on most types of wealth (Al Tayar,1987).4.4 Zakat on capital and its proceedsThis section introduces the main principles of Zakataccounting, which can be divided into two major categories:(i) a category where Zakat payment is a function of capital(mostly working capital) and growth (profits); and, (ii) acategory where the base is only a function of the growth.These two principles can be expressed mathematically, asfollows.Z =f ( Gr + We )... (7 )Z =f ( Ge )... (8)Where:WeGr= working capital= growth4.4.1 Zakat on animal wealthAnimal breeding and trading used to be one of the importantcommercial activities in the early days of Islam.Accounting for Zakat usually starts, therefore, with this116

type of activity (Joan, 1999). In order to qualify forZakat, four conditions have to be met:ownership of a minimum number of each type of animal;a year (354 days) has to pass since Zakat has been paid;animals should be pastoral; and,animals should not be kept for the purpose of working.4.4.1.1 Zakat on pastoral animalsPastoral animals are those that feed on freely grown orwild grass during most of the year. During parts of theyear these animals may, however, have to be fed because ofa lack of wild grass. Animals are considered to be pastoralif they are mainly fed from the wild. These animals arekept for the purpose of growth and not for work,transportation or cultivation (Farhud and Ibrahim, 1986).4.4.1.2 Situations to be observedThere are certain conditions the animals have to meet inorder for them to be used to fulfil the Zakat duty. Theseconditionsinclude.Health of the animal: the animal(s) to be given away asZakat should be in good health. This means that allanimals should have no apparent defects such as disease,117

oken bones, or gouged eyes (Joan, 1999). The onlyexception would be if all or most of the animals have thesame to type of defects, therefore, it is possible to payout the old if the owner only has old animals or sick ifall the animals are sick. The overriding rule is to paywith average animals; not the best of the herd and notlower than average (Farhud and Ibrahim, 1986).Sex: the sex of the animal should be observed if specified.A two-year-old male camel can be paid off if the herd doesnot contain a one-year-old female. This is done because theprophetsaid:If the one year female camel is not available, then atwo year old camel male will do. (Al-Sultan, 1997)This means that the difference in age makes up for thedifference in gender (Al-Sultan, 1997).Age: there is a consensus between scholars (like Imam Ahmadand Imam Malik) that the ages specified by the Prophet haveto be observed. If the animal specified for the Zakat dueis two years old, it has to be that - not one year andten months old. The reason for this is that the value ofthe animal is related to both its sex and its age (Joan,1999).118

Type: the collector of Zakat should observe the following:he should not choose one of the best among the herd, ratheran average animal should always be chosen. This is becausethe Prophet said to Muadh, when he sent him to Yemen,Beware not to take their best animals (in Zakat); and, thefemale that nurtures a baby, is used for its milk by itsowner, or is carrying a baby should not be taken (Al-Sultan, 1997).4.4.2 Zakat on cash and near cash assetsCash in this context may be defined not only as cash but asnear cash assets. This includes gold, silver, stock andsecurities and paper money, i. e., through the market or toindividuals. The general criterion that must be present forthese assets to be considered as cash is that they are, infact, cash or can be converted into cash very easily.4.4.2.1 Zakat on gold and silverDuring the early days of Islam, gold and silver coins werethe primary means of exchange. The Prophet's instructionsindicated that the minimum quantity after which Zakatbecomes a duty is 200 durhams of silver and 20 dinars ofgold. When the quantity reaches the minimum limits andremains on or above these limits, an annual 2.5 percent of119

the total amount becomes due. The determination of theseminimum amounts has led Muslim scholars to conclude thatthe two amounts were equal in value at the time of theProphet. According to Al-Qaradawi (1986), at that time thedurham had a weight of 2.975 grams and the dinar weighed4.25 grams. This means Zakat is due when a Muslim owns:2.975 x 200 = 595 grams of silver or4.25 x 20 = 85 grams of goldAl-Tayar (1987) has pointed out that these estimationsvary, according to the scholars, from 460 grams of silverand 70 grams of gold; 504 grams of silver and 100 grams ofgold (Gawjit, 1988) and 520 grams of silver and 89.2 gramsof gold (Farhud and Ibrahim, 1986). The reason for thisdiscrepancy is that some of these scholars want to beprecise while others tend to be conservative, since this isa religious duty. The financial authorities of most Muslimcountries should, however, adopt certain weights and usethem as standards.4.4.2.2 Zakat on paper moneyPaper money and coins made of materials other than gold orsilver were not known at the time of the Prophet and,therefore, the amount of Zakat due on this type of wealth120

was not established then. Paper money and coins act in thesame manner as coins of gold and silver in that they aremeans of exchange, stores of value, and have the same typeof acceptance to perform the same tasks performed by goldand silver (Joan, 1999). For these reasons, Muslimscholars have all agreed that Zakat on paper money andcoins is a compulsory duty, as soon as the minimum amountof this wealth is reached. They further agreed that theamount of Zakat due is 2.5 percent of the total amount(Farhud and Ibrahim, 1986). According to Al-Qaradawi(1986), most of the current Muslim scholars might lean toaccept silver as the acceptable measure of the minimumamount of paper money, after which Zakat becomes due, fortworeasons:a consensus on the minimum amount of silver exists and manyprophets' teachings have confirmed this minimum level; and,the current equivalent of 200 grams of silver is less invalue (13 times) than the equivalent of 20 grams of gold,This benefits the poor since more Muslims will be asked forZakat.Accordingly, Zakat becomes a compulsory duty as soon as aMuslim owns the equivalent of 85 grams of gold. If, for121

example,today is the date that Zakat is due and one gramof gold is equal to £6.33 and a Muslim owns £538.05, thenE13.45 should be paid for Zakat (£538.05 x 2.5%). Zakat isdue on jewellery of gold and silver (if it is not owned tobe worn) when they reach the minimum amount (85 grams and595 grams, respectively). If it is owned to be worn, on theother hand, Zakat is not compulsory because it is not ownedfor growth (investment). The general view of Muslimscholars is that Zakat is due on jewellery if what is ownedis excessive and is more than that normally used fordecoration.4.4.2.3 Zakat on stocks and securitiesStocks are certificates that represent a defined ownershipin the capital of a joint stock company. The owner of suchshares is considered a partial owner in the company.Investment in shares are one of the permitted investmentsin Islamic principles as long as the company isparticipating in permitted investment activities (Farhudand Ibrahim, 1986). Examples of disallowed activitiesinclude dealing in interest and the manufacturing, sellingor transporting of alcoholic products.In some Muslim countries, such as Saudi Arabia, the122

authoritieshave imposed the payment of the annual Zakat tothe government by all public and private firms (Al-Sultan,1997). Zakat of shares of companies in such countries arepaid off regularly and, therefore, no additional payment ofZakat in the year of receipt is necessary. Dividends thatare received by the shareholders and are retained by themfor one full year should be included in the Zakat pool (Al-Sadlan, 1989). In case the company does not pay Zakat theMuslim shareholder should pay Zakat on those shares thatbelong to him (Abujindi, 1988).4.4.3 Zakat pool of cash and near cash itemsIndividual items such as gold, silver, paper money andfinancial securities should be pooled in order to determinethe amount of Zakat to be paid. After the addition of allitems, debt to others should be subtracted and a minimumfor personal and family expenses also should be subtracted(Abbas, 1988). If the net amount after addition andsubtraction is more than the minimum amount after whichZakat becomes a duty (85 grams of gold) and a year haspassed since the last Zakat payment, 2.5 percent of thatamount is the amount due (Abbas, 1988).In case one of the items is owned for the reason of trade,123

this item should be considered as part of the pool of tradethat has different rules (as will be discussed in section5.6 in this chapter). Based on the above, the Zakat poolcan be determined as follows.Zp =[Cs + Ca ]- [Pe + Zs + D1 ]-------(9 )Where:Zp = Zakat poolCs = cash and near cash itemsCa = cash assetsPe = personal expensesZs = Zakat of shares that company has paidD1 =debtliabilityWhen the resulting amount has a value of 85 grams of goldor more and Zakat on this amount has not been paid for oneyear, 2.5 percent of that amount should be paid for Zakat.Example:A Muslim individual has the following cash and near cashitems and he wants to know how much he should pay in Zakat.124

HistoricalValueMarketValue££Cash in bank 20,000 20,000150 ordinary shares in company (A)@ £100 par value; £80 Marketvalue (MV) 15,000 12,000100 ordinary shares in company (B)@ £80 par value; £110 MV 8,000 12,000500 ordinary shares in company (C) 40,000 55,000@ £80 par value; £110 MVDebt security 40,000 35.000Total: 123,000 134,000In addition he has borrowed a total of £25,000, and hedetermines his living expenses at £2,500 a month.Solution:The net cash amount owned by this individual is more than£850 (85 grams of gold @ £10).fCash and near cash owned (market value) 134,000Less:borrowed money (25,000)Annual living expenses (30.000)Amount subject to Zakat: 79,000Zakat @ 2.5 percent (79,000 * 2.5%) 1,9754.4.4 Zakat on agricultural produceZakat on agricultural products has been determined by theprescription of the Qur-an and from real determined125

Prophet's obligations. The amount of Zakat is establishedat 10 percent of products that have been irrigated (with noexpenses). Such products include those products that areirrigated by rain or rivers, or 5 percent of products thathave been irrigated by underground water with additionalexpenses and work. The amount of Zakat depends on themethod of irrigation and planting. The annual passage (thecondition of one Zakat each year) is not a condition ofpayment of Zakat on agriculture products, rather Zakat isdue at the time of harvesting (Farhud and Ibrahim, 1986).4.4.4.1 Types of agricultural produce subject to ZakatThere is a wide disagreement in Muslim jurisprudence on thetype of products on which Zakat is obligatory. There aresome that see Zakat as an obligation on only four types ofproducts: wheat, barley, dates, and raisins (Gawjit, 1987).Others see Zakat as a duty on all food that is nourishingand can be inventoried or dried. This includes wheatbarley, corn, rice, and the like (Al-Tayar, 1987).Nourishing food means what people use as their main foodout of necessity, not choice. There is, therefore, no Zakaton food like peanuts, fruits and vegetables (Gawjit, 1987).Yet others take the view that Zakat is a duty on all thatis grown on land by people's efforts which does not include126

wild plants used for wood and wild grass. The reason forthis disagreement is that the Qur'an has made generalreferences to all plants while the Prophet's teachings havemade exact references to the four main products: wheat,barley, dates and raisins. Some Muslim scholars havethought, therefore, that Zakat is only a duty on those fourproducts. Others have thought Zakat is due on all productsthat have the characteristics of these four products. Athird group are of the opinion that Zakat is due on allproducts and the precise mentioning of the four products inthe Prophet's teachings were because they were the mainproducts grown at that time (Shahata, 1977). It seemsreasonable to accept the view, as correct, of those who seeZakat as an obligation that should be paid on allagriculture products because of the general reference toZakat on all products by the Qur'an; not excluding anyproduct specifically mentioned by the Prophet (Abujindi,1988). In this regard, Al-Qaradawi (1986) says thisdirection is what agrees with the wisdom of the legislator.It is not wise - as it appears to us - that thelegislator would obligate the grower of wheat and barley topay Zakat and not do the same to someone who owns groves ofapples, oranges and/or mangos.127

4.4.4.2 Starting point of Zakat dutyThere is no Zakat on anything that can be measured by ameasuring standard unless the quantity harvested is about653Kg. This measurement is based on the prophet sayingthat There is no Zakat on what is less than five wassaks(Al-Sultan, 1997).Five wassaks have been determined to equal 653Kg. Thestarting point of Zakat on products that cannot be measuredby a standard (such as cotton) is not clear in Islamicjurisprudence. The starting point should be the equivalentin value of the least expensive measured product. If,therefore, the value of 653Kg of barley considering barleythe least expensive product is £1,000 then Zakat is due oncotton when its value is equal to, or more than, £1,000.Al-Qaradawi (1986) prefers this suggestion, although hepoints out that the equivalent measure should not be theleast expensive of the products and not the most expensive,rather a product that is in the middle ground in terms ofvalue. According to Al-Qaradawi (1986) this is so that wedon't injure the poor or do injustice to the rich. It seemsthat this is a good method as long as the standard productis agreed upon.128

4.4.4.3 Amount of Zakat on agricultural produceConsensus exists among Muslim scholars on the amount thatshould be paid on agricultural products. This amount is 10percent of products that have been irrigated with noexpenses. These include those products irrigated by rain,rivers, and underground water (A1-Tayar, 1987). Zakat isonly 5 percent on products that are irrigated withadditional expenses and work. The means by which irrigationis delivered is irrelevant. The irrigation can be by theuse of animal or machinery. On those products irrigatedevenly by both methods, Zakat is calculated at 7.5 percentof the total product. If one of the means is used moreoften, then the calculation is relative to that mean or 10percent if no expenses is the dominant means and 5 percentif an additional expense is the dominant means (Gawjit,1987).4.4.5 Zakat on income from labour and professions4.4.5.1 Zakat on personal incomeBy income from labour we mean income that is gained as aresult of employment, whether continuously or periodicallyin performing certain jobs by hand or mind. A second typeof income is that gained as a result of self employment,129

such as income earned from practising medicine, in the caseof an MD, or income from a CPA practice (Farhud andIbrahim, 1986).Zakat is an obligatory duty on all types of income,according to the consensus of Islamic jurisprudence. Adisagreement exists, however, on whether the passage of theyear since the income is earned is necessary before Zakatshould be paid, or whether Zakat should be paid as soon asthe income is collected (Gawjit, 1987).Zakat pool can be determined as follows:Z=2.5%(Saving- Debit)...... (10 )Example:A Muslim employee receives a monthly salary of £2,500 andhe wants to pay Zakat. When and how much should he pay if 1gram of gold = £6.33?Solution:The minimum obligatory amount = 85 x £6.33 = £538.05.Therefore, he should start counting one year after thefirst month's salary is received. If at the end of the yearthis person accumulates in savings an amount equal to£6,000 he should pay 2.5 percent of that amount if he does130

not owe any money. If he does owe money, however, thepayment should be based on the net amount.Zakat payment = 2.5 (£6,000) = £150If he owes £2,000 in debt his Zakat obligation is:Z=2.5 (£6,000- £2,000) = £1004.4.5.2 Zakat on mineralsMinerals are valuable commodities and may be dug from minesor bumped from wells (e. g., gold, silver, oil, etc). Themost widely accepted Zakat rate is 20 percent after allcosts and expenses are deducted (Farhud and Ibrahim, 1986).Most of the Muslim scholars do not impose any conditions onthe payment of Zakat on these commodities, such as thepassage of a year and minimum amounts. According to themajority, 20 percent of the net quantity extracted shouldbe paid as Zakat as soon as it becomes available and nominimum amount is necessary (A1-Tayar, 1987). This amountcan be paid to the eight Zakat beneficiaries or to thegovernment. Most scholars, however, like Imam Malik, preferthe payment to be made to the government (Al-Qaradawi,1986). This 20 percent should be paid if the mineral isextracted from Muslim lands whether the extractors areMuslims or non-Muslims.131

There is a widely known view of Malik (one of the fourmajor Sunnah jurisprudence scholars) by which he determinesthat all that is extracted from beneath the surface of theearth (in whatever form, whether solid or liquid) belongsto the Muslim treasury (Al-Qaradawi, 1986).4.4.5.3 Zakat on catches from the seaCatches from the sea includes all benefits that have beenrealised from the sea. This includes fishing for fish andpearls, in addition to all other benefits extracted fromthe sea. The most widely accepted position is that therate for all that comes from the sea is 20 percent of thatquantity as soon as it is available (Al-Qaradawi, 1986). Ifgreat expense is required to make the catch then all theseexpenses should be deducted before the 20 percent iscalculated (Al-Tayar, 1987). Some Muslim scholars, like Al-Qaradawi, take the view that if great expense is involved,only a 10 percent rate should be used which is half therate if no expenses are incurred. This is based on theagriculture product rates of 10 percent if no irrigationexpenses are involved and half that if irrigation expensesare involved (Shahata, 1977). There is no Zakat on fishuntil the quantity is equivalent to the obligatory cash132

amount (85 grams of gold) and the rate should be only 2.5percent. This rate is the more equitable rate since fishinghas become a huge industry, and is done at great expense.At the present time this industry seen as similar totrading and manufacturing (Al-Qaradawi, 1986).4.5 Authorities responsible for thecollection of ZakatIslamic shariah gives a governor the opportunity to collectzakat. The Qur'an says:Take alms from their wealth in order to purify them andsanctify them with it (Qur'an, chapter 9, Al-Attawbano. 103).As mentioned in previous sections, the Zakat base is 2.5percent of Muslims' wealth. In practice it is paidindividually and directly to the needy without anymediation from the government (Department of Zakat). OnlySaudi Arabia amongst the GCC countries involved in thisstudy has a Department of Zakat. During 1975 the governmentused to collect and distribute 1.25 percent and left theremaining 1.25 percent to the Zakat payer to distribute;given that the Zakat payer provided documents to prove thepayment. This procedure was changed in 1984 when thegovernment decided to collect and distribute the entire133

amount (2.5 percent). In Saudi Arabia, since 1951, twoauthorities have dealt with the collection of Zakat, namelythe Department of General Income and the Department ofZakat and Income. The first collects Zakat on money andgoods while the second levies Zakat on arable products andlivestock, as detailed below.In this respect, in the other GCC countries, no regulationhas yet been set for Zakat. So charitable organisations inthose countries have started to regulate Zakat and acceptZakat from any one who is willing to pay it and theydistribute it to the needy themselves. Islamic banks in theGCC countries facilitate the collection and distribution ofZakat on a limited scale.4.5.1 Department of Zakat and IncomeThis department was established in Jeddah in 1951 by theFinance Ministry Decision No. 394 of 14/6/1951. Although thedepartment is autonomous, it is subordinate to the Ministryof Finance (Ministry of Finance Decision NO. 7-2870 of22/9/1370,1972).The Department of Zakat and Income uses informationprovided by other government ministries and departments to134

calculate and collect Zakat from Zakat payers. For example,all ministries must provide the department with copies ofagreements they make with Saudi individuals and companies(Cabinet Decision No. 378,13/4/1391,1971). Informationabout registered traders, and the value of exported andimported goods are also provided to the department (FinanceMinistry Decision no. 340,1/7/1370,1951).Articles 21 and 31 of the Finance Ministry Decision no. 340of 1/7/1370 (1951) provides several penalties for those whoevade or refuse payment of Zakat, those who do not pay onthe legal dates, and those who provide false statementsabout their wealth. The penalties prescribed include payingfines, prohibition from travelling abroad and prohibitionfrom transferring money. The department also has theauthority to impose the payment of Zakat through variousmeans, including asking local police or governors to compelthe payment (Cabinet Decision no. 75 of 7/1/1374,1954). Itshould be noted that the Department of Zakat and Incomecould neither distribute nor spend the collected Zakatmoney. There are other departments responsible for thedistribution of Zakat.135

4.5.2 Department of General IncomeEstablished in 1951 (Finance Ministry Decision no. 340,1/7/1370,1951), this department is responsible for thecollection of Zakat on arable products and livestock. Aregion's governor and the Ministry of Finance formcollection missions (hamalat) to supervise the collectionof Zakat. Each mission includes individuals responsible forthe calculation of Zakat (Kuttab), individuals for theactual collection of Zakat (Qubbad), and two experiencedlocalpeople.4.5.3 Authority responsible for thedistribution of ZakatThe authority responsible for the distribution of Zakat isthe Social Security Department, established in 1962 (RoyalDecree No. 165,4/3/1382,1962). The resources of thisdepartment include government assistance and the collectedZakat. These were determined by Royal Decree No. M/32,20/10/1385 (1965), which states that the collected Zakatshould be paid to the account of the general treasury ofthe government so that it will be spent with the extrafunds which the government assigns for social securitypurposes. While the extra funds may be spent for any social136

purpose, Zakat money must only be spent on thosebeneficiaries prescribed by Islamic Law (Al-Sayyid, 1972).4.6 Zakat on assets of tradeIt has been shown in the previous section that 2.5 percenthas to be paid by every Muslim who, at the end of the year,owns a net pool of cash equal to or greater than theequivalent of 85 grams of gold. In this section the Zakaton assets of trade is examined.Assets of trade are those assets other than cash or nearcash items that are made available for trading purposes.These assets include apparel, equipment, foodstuffs, animalstock, land, and buildings. Some scholars, like Imam Ahmed,have defined assets of trade as whatever is placed on salefor profits. A Muslim who, at the end of a year, owns adefined minimum amount of such goods that have been placedfor trading purposes has to pay 2.5 percent of their valueat the end of that year. This includes any profitsgenerated from the trading activities of such items duringthe year. Al-Qaradawi (1986) describes assets of trade bystating:Not all that a person buys are assets of trade. Aperson might buy clothes to wear, furniture for hishouse, or a car to use. All this is not consideredassets of trade, but rather assets of ownership. (Al-Qaradawi, 1986: 317)137

He further describes some conditions for assets to beconsidered as trade assets. They should meet twoconditions: the intention of the individual and action.Intention is the intention to make profits and action isthe selling and buying of assets. The existence of one ofthe conditions is not enough to make an activity a trade.Intention of making a profit is not sufficient to describean activity as trade without actually practising trade. Inaddition, practising trade without the intention ofengaging in trade and making profits is not enough to makean activity a trade. The importance of the above twoconditions can be clarified by the following example.A man bought a car for personal use. At the same time, heintends to sell the car if he is offered more than he paidfor it. Even though he intended to sell the car if he isoffered some profit, the man did not actually take stepssuch as advertising, nor did he make it a habit to go tothe market to offer it in sale. This man has not,therefore, engaged in trade, even if the car is sold. Hemay have a habit of buying and selling cars, but uses suchcars for his personal use until he finds a buyer. Thispersonal use does not take the car out of trade because hisintention is to sell the cars, and from his past actions138

this activity indicates that this is part of his usualpattern of activity. Embarking on licensing procedures,advertising, or past patterns can fulfil the criterion ofaction.Another issue common to all forms of wealth relates to thetime of ownership of a minimum amount of wealth. Theminimum amount is the same as that of cash and near cashitems, that is, the equivalent of 85 grams of gold. Theissue discussed by many Muslim scholars is when to checkwhether a minimum amount exists: at the beginning and endof the period, at all times during the year, or only at theend of the year. There are supporters of each method. SomeMuslim scholars, like Imam Ahmad, are of the viewindividuals that should only look at the beginning and endof each Zakat period even if the amount is less during thatparticular period. According to Al-Qaradawi (1986), if theassets are less than the equivalent of 85 grams of gold,and have increased to that amount, a year should start oncethe amount has become equivalent to 85 grams of gold. Ifduring the period the amount decreased to less than 85grams of gold, no Zakat is due until the value stays at 85grams or more for a complete year. A third opinion saysthat the amount should only be considered at the end of the139

year. Zakat is payable on both the principle and profits,and it is possible to calculate profits at the end of theyear. It seems that the third option is the easiest toapply, especially if the government is performing thecollection of Zakat. In addition, there is the fact thatthe prophet provided no proof that the condition ofownership of the equivalent of 85 grams of gold at alltimes during the year was necessary. Once a Muslim hasaccumulated the equivalent of 85 grams of gold, the yearhas, therefore, started. At the end of the year the valueof the goods should be examined. If they are equal to orgreater than the equivalent of 85 grams of gold, 2.5percent of that amount should be paid as Zakat. Thisamount should be checked at the same date the next year. Ifit is more than or equal to 85 grams of gold 2.5 percent ofthat amount is due also. The value of goods should bechecked and Zakat should be paid if the amount is equal toor greater than the equivalent. of 85 grams of gold.4.6.1 Classification of commercial assetsAssets other than cash and near cash items are classifiedunder Islamic accounting practice into two distinct types:trade assets and production assets. Shahata (1977) confirms140

this fact when he says:According to the four doctrines of Islam, Zakat is notdue on the equipment of production in all cases, whethertheir effects are left on the product or not. The same istrue when estimating the Zakat of a trader; containers ofgoods and work equipment are not considered part of theZakatpool.Assets of trade are financial items such as accounts inbanks, accounts receivable, and inventory turned over forthe purpose of growth. Production assets are the same asfixed assets in contemporary accounting practices. Theyconsist of assets held long term. These assets are notowned for the purpose of their own growth or for theintention of resale, rather they are held to support thebusiness. They include land, buildings, plant andequipment, and vehicles. Current assets (working capital)are subject to Zakat as long as they are equivalent to ormore than 85 grams of gold. Zakat has not been paid on themfor one year, and they are retained for the intention ofseeking profits and growth. Fixed assets, on the otherhand, are not subject to Zakat, as long as they are notheld for the purpose of trade (Al-Sultan, 1997).4.6.2 Current assets4.6.2.1 Cash and DebtorsCash and debtors. All narrated actions (actions told of141

through proper channels of the Prophet's conduct) andstatements of past jurisprudence of Islam, indicate thatthe payment of Zakat on lent money that is expected to bereceived is obligatory. As a sample of these statements astatement of the third caliph Othman is quoted, Zakat is anobligation on loans that if you wished to collect you areable to do so (cited in Al-Sultan, 1997: 77). Accountsreceivable, created as a result of a sale are, therefore,subject to Zakat, as long as those accounts are expected tobe received (which is the same as the view adopted whenZakat on cash was discussed). The higher court in SaudiArabia has ruled that loans to a third party are subject toZakat as long as those loans are expected to be received(Yahya, 1986). This means that loans that are doubtfulshould be subtracted in arriving at the Zakat pool. TheSaudi Arabian Zakat and income authorities have obligatedmanagement of firms to show documents of their requests forloan payments by third parties. In the case that thesedocumented loans are finally repaid, Zakat should be paidfor all past periods.4.6.2.2 StockStock is usually composed of assets waiting to be sold.According to GAAP, inventory is valued at historical cost142

without consideration to its current market value unlessthe latter is less than historical cost in value. Thisimplies that losses are taken into consideration, whileprofits and growth are not considered until inventory issold. Consensus does not, however, exist in Islamicjurisprudence. Some scholars, like Imam Ahmad, believethat Zakat should be calculated according to its equivalentcurrent value, others deem that Zakat should be paidaccording to the stock's historical value. Most of Islamicjurisprudence agrees, however, with the first doctrine,which calls for the use of current value. Al-Qaradawi(1986) believes that current value of wholesale pricesshould be used because this is the only possible price ifsale is to be executed quickly. According to (Al-Sultan,1986: 56) :The wholesale value is the same as the replacementcost of the inventory, which contains appreciation invalue as a result of passage of time. Sellingexpenses have to be considered if selling prices areused. It is better to use replacement values sincethey can be determined fairly easily, and thereforewill only contain profits that have a high degree ofcertainty.Selling prices and expenses are not, however, all thatdifficult to determine. In addition, profits are fairlycertain if the business is intended to continue. Themanagement or the owner at the date Zakat is due should,143

therefore, make a list of the average prevailing prices atthat date (wholesale). Volumes then multiply the resultingprices, selling expenses are subtracted and then the netresult is the base for calculating Zakat.4.6.3 Liabilities arising from current assetsThese liabilities consist of creditors, notes payable andshort-term loans. These short-term liabilities are a resultof the acquisition of current assets; such liabilitiesshould be subtracted from current assets in order to arriveat the Zakat base (Jammjoum, 1995).In a case where theseliabilities result in the reduction of the Zakat base to alevel lower than the equivalent of 85 grams of gold, thenthere is no Zakat payment (Al-Qaradawi, 1986). Long termloans, as well as their current portion, that arise fromthe purchase and/or financing of production assets, are notsubject to Zakat as long as they are used to finance fixedassets of the firm. On the other hand, if part of thelong-term loan is used for financing part of the workingcapital, i. e., permanent working capital, then that partshould not be subtracted (Yahya, 1986).144

4.6.4 Calculating the Zakat baseThe Zakat base can be determined by using two methods: thedirect method and the indirect method. The direct methodcalls for analysis of the elements of the Zakat base, i. e.,cash, inventory, accounts receivable, accounts payable, andnotes payable. The indirect method calls for the analysisof equity accounts. Both methods should yield the sameamount of Zakat liability. The two methods are describedas follows (Al-Sultan, 1997).4.6.4.1 Direct methodIn order to calculate the Zakat base, we start by addingthe balances in assets of trade at the end of the year.The reason for adding balances at year-end is that thesebalances contain any undistributed profits on which Zakatshould be paid. By using year end balances, any portion ofthe profits that went to fixed assets will not be includedin the Zakat base (which should be the case, since there isno Zakat on fixed assets). Current liabilities should bededucted from current assets since Zakat is payable onowned assets only. The final step is to add any unrealisedprofits on inventory, since it is actual wealth and not thehistorical cost of this wealth that is at issue. The145

unrealised profits should be net of any selling expenses.Long term assets are not added since Zakat is not paid onthese assets and long term debt Zakat is payable on ownedassets only. Based on the above, the Zakat pool can bedetermined as follows.Zakat base, using the direct methodZb = 2.5% ( C'a -C1 ± Sv ± Iv ]......(11)Where:CaClSvcurrent assets (Debtors + Stock + Short term invested + Cash + Prepayment)= current liabilities (Creditors + Short term loan + Accrued expense)= Stock value (+ if the MV > BV; -if the MV < BV )IV Short term investments (+ if the MV > BV; -if the MV < BV4.6.4.2 Indirect methodThis method concentrates on calculating the Zakat basethrough a determination of an owner's net worth excludingthat portion arising from fixed assets. The starting pointis paid on capital at the end of the year. Items that areadded include net profit for the year, retained profits,all reserves and appropriations (except accumulateddepreciation and end of service appropriations) and creditbalance of owner's account. This method is one followed bythe Saudi income and Zakat authorities (Al-sultan, 1997).In order to obtain the net worth figure, net of fixedassets, the dollar value of these assets (net of146

accumulated depreciation) should be deducted from the abovetotal. Also all accumulated losses should be deducted toarrive at the Zakat base. Net assets have to be free of anydebt carried to finance these assets. In case such debtexists, these debts should be added back to the base,otherwise double counting will occur. Based on the above,the Zakat pool can be determined as follows.Zakat base, using the indirect methodZb= 2.5% {[ Pcn1 + Pal + Reno + RS ± S ± I+ Bl ]-[ Nfan1] (12)Where:PcnlPnlRpnoRsS,IvBlNfanl= Paid in capital (end of the period)= Profit for the year= Retained profit at the (bingeing of the period)= Reserves at the end of period= MV of stock - BV of stock (+ if the MV > BV; -if the MV < BV)= MV of I - BV of I (+ if the MV > BV; -if the MV < BV)= Bank loan= Net fixed assets at the end of yearIllustrativeexample:In order to further understand the above two methods, thefollowing illustration is now introduced.147

Balance Sheet 31-12-19X230-12-XXX130-12-XXX2££££FixedAssetsLand 400,000Long term invested 100,000350,000150,000Buildings 900,000Accumulated Depreciation (200,000) 700,0001,200,0001,000,000(300,000) 700,0001,200,000CurrentAssetsDebtors 40,000 30,000Stock 200,000 250,000Short term investment 20,000 20,000Cash 100.000 110,000360,000 410,000Total Assets 1,560,000 1,610,000Liabilities and Owners' EquityAmounts Falling Due Within One YearCreditors 40,000 50,000Notes Payable 30,000 20,000Accrued Expense 30,000 5,000100,000 75,000Working Capital 260,000 335,000Amounts Falling Due WithinMore than One YearBank Loan 300,000 300,000FinancedBy:Paid in Capital 1,000,000 1,000,000Retained Profit 110,000 195,000General Reserves 50,000 40,000Total Liabilities and Equity 1.560.000 1,610,000Profit and Loss Account for the Year Ending 31.12.19X2Revenue 900,000Cost of Revenue -(600.000)Gross Profit 300,000Expenses 175,000Net Profit 125,000The market value of stock at the end of 19X2 was £300,000.The MV of short term invest at the end of 19x2 was £40,000148

Calculation of Zakat using direct method:Zb = 2.5%[ Ca-Cl ± Sv ± Iv lCurrentassetsDebtorsStockShort term investCashTotal current assetsTotal current liabilities30,000250,00020,000110,000410,000(75,000)Workingcapital335,000Increase in stock value50,000Zakatbase:385,000Zakat at 2.5% (385,000)9,625Calculation of Zakat using indirect methodZb = 2.5% {[ Pcnl + P,, 1 + R... + R. ± S ± I" + B1 ]-[ Nfan1] }££Paid in capital end of year1,000,000Netprofit125,000Retainedprofits110,000Increase in stock value50,000Bankloan300,000 565.0001,585,000Net fixed assets end of year(1.200.000)Zakatbase:385,000Zakat at 2.5%*(385,000)9,6254.7 SummaryIn this chapter, Zakat calculations for most forms ofwealth were discussed. The calculations were presented sothat the reader could gain some understanding of the149

literature behind the selection of different methods. Thevariety of methods are caused by the differences betweenjurisprudence in interpreting Qur'an statements, theProphet's statements, and precedents. Zakat on all forms ofcash (gold, paper money, and jewellery) is at 2.5 percentof their total amount at the end of the year as long asthis amount is equal to or greater than the equivalent of85 grams of gold. Zakat on silver is paid at 2.5 percentannually when the wealth is equal to or greater than 85grams. Zakat on agricultural products depends on themethod of irrigation and planting. Zakat on personal incomeshould be paid at 2.5 percent of net savings at the end ofeach year, after deducting debts, and an allowance of oneyear's essential expenses.Given that the focus of this study is to investigate zakaton commercial transaction, two approaches were examined asbases for Zakat calculation; namely the direct and indirectmethods. While the first method emphasises change inworking capital, the indirect approach is mainly based onreported profit. In all cases, both approaches result inthesame figure.On the other hand, the system of Zakat is still facing some150

difficulties. These difficulties can be classified intothreegroups.The first group relates to differences among religiousscholars about the ways of calculating the Zakat base.Despite the minor nature of these differences, they doaffect the Zakat itself; the elements would have to beincluded in the Zakat base and thus its amount. Suchdifferences in view last a long time and consensus wouldnot be easily reached.The second group of difficulties occur when considering themechanism for collecting Zakat (where evasion is commonfrom companies, due to their non-disclosure of realaccounts to the authority for Zakat estimation). As aresult, the Saudi Arabian Government has announcedlegislation by which it has created new offences forbusiness that attempt to escape paying the right amounts ofZakat.The third group concerns the methods of Zakat distributionto the people listed in the religious statement. It mayhappen that some beneficiaries have not gained theircorrect share of Zakat.All these problems impose real challenges to any suggested151

Zakat system supposedly to be applied in the Gulf States.The researcher has taken into account these difficulties indesigning the fieldwork questionnaire in the next chapter.Solutions to these problems would help in providing answersto some of the questions raised in this chapter.152

ChapterfiveResearchmethodology

ChapterfiveResearchmethodology5.0 IntroductionIn the previous chapter the literature on Zakat wasconsidered. It was evident that many issues related toZakat remained without clear answers. This chapter willidentify these issues and provide answers through anempirical survey covering four GCC countries. The studyobjectives and methodology used to carry out the survey andthe analysis are offered in this chapter, which consists offive sections. The study objectives are discussed insection two. In section three the survey questions arediscussed. Section four presents the research methodology.The advantages and disadvantages of using the questionnaireas data collection instrument of this study are consideredin this section. In addition, the steps of questionnairedesign, question formulation, pilot testing of thequestionnaire, sampling procedures and questionnairedistribution procedure are described and discussed in thissection. Finally, statistical tests employed in this studyare the subject of section five.153

5.1 Study objectivesThe main objectives of this study are to examine currentmethods used to account for, and highlight variations inZakat accounting, in the four GCC countries. In particular,the study sets out to explore the following issues:1. whether or not Zakat accounting practices are importantinGCC Countries;2. whether or not investors consider announcement of Zakatimportant when making investment decisions;3. whether or not company annual reports, in the GCCcountries, should include information about Zakat;4. the perceptions of various users on who should beresponsible for Zakat regulation in the GCC countries;5. whether or not harmonisation of Zakat accountingpractices is possible in the GCC countries;6. factors that may effect the low standard of Zakataccounting practices in the GCC Countries; and,7. the potential benefits from the harmonisation of Zakataccounting practices across GCC Countries,Therefore, the research questions to be tested in thisrespect are formulated as follows.154

5.2 Research questions5.2.1 Zakat paymentThe Zakat is the third of the five major pillars(principles) of the Islamic faith. Among these fiveprinciples, Zakat is the one that forms the basis of anIslamic economy. Zakat is a compulsory religious duty. TheTawrat and the Bible both urge the faithful to offer alms(donated charity), which is a form of Zakat (Yahya, 1986).In fact the Qur'an has mentioned that Ismail, Isaac andJacob were all ordered to pay Zakat. Jesus on the otherhand, has been quoted in the Holy Qur'an as saying:I am indeed a servant of Allah; He has given me Revelationand made me prophet, and He hath made me blessedwheresoever I be, and hath enjoined on me prayer and Zakatas long as Ilive. (Qur'an, chapter 19: 30 and 31)The purpose of life according to Islamic principles is theworship of Allah by doing what He asked us to do andrefraining from what he has cautioned us from doing. Zakatis to give thanks for the gift of money. The performance ofZakat means, therefore, that the Muslim has obeyed Allah,which gives the individual the satisfaction he/she needs.Some scholars, like Immam Ahmad, mention that Zakat helpsindividuals to overcome greed, which is considered by manyas an unwelcome trait, and which is clearly mentioned inthe Qur'an (chapter 17: 100). Payments of Zakat, therefore,act to purify the soul and improve people's self images.155

One way that the rich benefit, by paying Zakat, is in beingable to feel part of the general social environment. Inthis way, Zakat acts as a mechanism for the distribution ofwealth, which helps in closing the gap between the poor andthe rich. It was, therefore, deemed important toinvestigate the perceptions of the selected groups ofrespondents regarding Zakat payment.Research Question (1)" What are the various perceptions, of the selectedgroups of respondents, of Zakat payment?5.2.2 Compulsory nature of ZakatThe principle in Islamic law is for Zakat to be collected,under state supervision, for those who deserve it. Zakatis not merely a kind action to be left to the choice of theindividual Muslim - even if it were to be preferred for aMuslim to personally distribute the Zakat due on his or hermoney. It is a compulsory obligation on the ruler toappoint those responsible for collecting and distributionZakat to those deserving it. Allah has made it a duty forthe Muslim state (Attawba, 103). According to (Al-Sultan,1997) if a Muslim state is found not to be gathering Zakatfrom its people and spends it on those deserving, a Muslimis obliged, by his faith, to personally carry out its156

distribution to those deserving it and not to stop for anyreason; for Zakat is a permanent right and nothingabolishes it, neither in advance nor by passage of years.Islam has prohibited all types of ploys, by those who mustgive it, to drop Zakat. Islam rejects any attempts to avoidpayment. As the Prophet, said:Deeds are done by their intention and every person isrewarded by what he intended. (Al-Albani, 1998)Before any other matter, Zakat is a relationship between aMuslim and his Lord. Whoever has to pay Zakat does not feeloppressed because the one who obligated it is Allah. Ingeneral, Muslims believe that Zakat purifies and sanctifiespeople and their money, and that it guards their wealth andmakes it grow. If the belief is low in some people andthey have deluded themselves into avoiding or refusing togive Zakat, it should be taken from them by compulsion andeven, if necessary, by force (even if it requiresfighting). This is what The Sunna has confirmed in writingof the history of the actions at the time of the Prophetand rightly guided caliphs. As Abu Bakr Assiddeeq (mayAllah be pleased with him) said concerning those whorefused to pay Zakat for their wealth:By Allah if they deny me what little that they used togive to the prophet, may blessings and peace be upon him,I would fight them for denying it. (Al-Albani, 1998)157

A monetary punishment may be a sufficient penalty towhoever does not pay Zakat out of laxity or greed. As towhoever does not pay it out of rejection, the matter doesnot stop with a monetary penalty.In the other GCC countries, no regulation has yet been setfor Zakat, so charitable organisations in those countrieshave started to accept Zakat from any one who will pay itand they distribute it for them or by recommendation fromthemselves. Islamic banks in those countries also do this.It was, therefore, important to investigate the perceptionsof the selected groups of respondents regarding thecompulsory nature of Zakat.Research question (2)" What are the various perceptions, of the selectedgroups of respondents, regarding the reasons thatmight prevent some Muslims from paying Zakat?5.2.3 Zakat accountingIn Saudi Arabia, three parties are involved in determiningand estimating Zakat revenues. According to the Zakatregulations (1988) these are: companies (the owners), theZakat department (government) and audit firms (independentbodies). There is a conflict of interest between the ownersand the agency responsible for collecting the Zakat (Zakat158

egulation, 1988). Companies, using the generally acceptedaccounting principles and their flexibility in application,can inflate expenditure or deflate revenues which, in thefinal analysis, would decrease or even cancel the Zakatpool. By contrast, the Zakat department views such measuresby companies with suspicion and mistrust. It always strivesto counter this practice by cutting down or cancelling anumber of expenditure items and increasing revenues, orcreating some revenues that company administrators mighttry to exclude from the Zakat pool (Zakat regulation,1988). An independent or legal auditor is supposed to beneutral in determining the Zakat pool since he/she has nodirect interest and strives to be just. There is, however,a tendency to perceive this group as representingcompanies' interests (in their determination of the Zakatpool) because of companies' direct involvement with thisgroup. Nonetheless, the final assessment is that arrivedat by the Zakat department (Zakat regulation, 1988). Itwas, therefore, important to investigate perceptions, ofthe selected groups of respondents in connection withvariations in accounting for Zakat.Research question (3)" What are the various perceptions, of the selectedgroups of respondents, of variations in Zakataccounting?159

5.2.4 Zakat auditingAuditors are appointed by the government's Zakat departmentfor the determination of the amounts of Zakat (Zakatregulation, 1988). They are involved in the examination ofthe special reports involved with the determination ofZakat. They go through various procedures of examinationand auditing to -impart greater credibility and added valuefrom the investor's point of view (SOCPA, 1997). Auditingaims to add further confidence to the revenue bills. Inorder to achieve this, parties using such bills must haveconfidence in the auditor's competence in reporting thefinancial position of the company. Achieving this requiresthe availability of certain objectives, defined andreasonable auditing criteria, that all auditors shouldadhere to and which are regarded as standard for assessingthe auditor's efficiency and the quality of the work he/sheundertakes (Ministry of Commerce, 1986).It was, therefore,important to investigate the perceptions, of the selectedgroups of respondents, that took part in this study,regarding the usefulness of Zakat auditing.Research question (4)" What are the various perceptions, of the selectedgroups of respondents, of the usefulness of Zakatauditing?160

5.2.5 Zakat regulationRegulating Zakat with respect to the collection procedures,methods of collection and auditing of the Zakat pool, areimportant aspects that should be given the utmost care. AZakat assessment vacuum has become evident in countrieswhich do not have an official agency for the regulation ofZakat. From the Shariah or Islamic point of view, thegovernor is responsible for the collection of Zakat. Thefoundation of an agency to deal with Zakat is the state'sresponsibility (Qur'an, chapter 9: 103). A law has beenpassed in Saudi Arabia that regulates issues relating toZakat. The Ministry of Finance, in collaboration with theclergy and accountancy firms, has been commissioned toformulate Zakat regulation. In some Islamic countries,where the government does not observe this procedure,officially authorised charities traditionally perform thisfunction. It was, therefore, important to investigaterespondents opinion on who should regulate Zakat.Research question (5)" What are the various perceptions, of the selectedgroups of respondents, of who should regulate Zakat?161

6.2.6 Zakat measurement and disclosureIn 1996, the Saudi authority passed a bill on the standardof accounting for Zakat and tax. The standard provides thatcompanies should disclose Zakat in their revenue bills, andwhether they are subject to the Zakat or taxation.It also provides that Zakat measurement should be made inaccordance with the rules and regulations of theorganisational framework of Zakat in the Kingdom of SaudiArabia, irrespective of any provisional differences betweenthe net Zakat income and the net accountancy income(Article 122). Zakat expenditure should be declared as anindependent item in the profit and loss account after thespecial items of gains and losses and before the netincome. The measure also provides that the revenue bills ofthe company should include the following items of the Zakatpool, and their amounts; the amount of Zakat due to thestate's treasury at the end of the year, and the years forwhich they were not declared (Article 125). The need forthese explanations are essentially related to presentingexternal financial reports of a public interest nature.These present adequate information to help the mainbeneficiaries in assessing the capability of the activityto generate an adequate positive financial flow to meet duefinancial obligations, including distributing profits to162

capital owners (Article 70).The measurement of Zakat andits declaration in company financial reports in the GulfStates may facilitate the co-ordination process of Zakatbetween the Council States. It, was therefore, important toinvestigate the perceptions, of the selected groups ofrespondents, who took part in this study, of the annuallevel of Zakat measurement and disclosure in GCC countries.Research question (6)" What are the various perceptions, of the selectedgroups of respondents, of Zakat measurementdisclosure?5.2.7 Possibility of Zakat harmonisationAccording to Olfet (1988) it is difficult to find anywherein the world any group of states, distinguished in itscohesion and commitment to a set of attributes, such asexemplified by the group of Arab Gulf states. The sharingof one faith means they are enriched by shared morals and ashared language dissolves any obstacles in the way ofrealising communication between each other. Its sharedculture produces a real bond between them and climatic andgeographical circumstances have created agreement in stylesof clothes and residence. The bases of their wealthresources and the coastal line bordering these countriesassociate their economic destiny with that ever expanding163

commercial and mutual space between them and the rest ofthe world, where they share the world's prosperity as agroup and face decline as a whole. These similarenvironmental circumstances led to the forming of theCommittee of Co-operation of Arab Gulf states in February1991. The Committee of Co-operation of Arab Gulf States isa political, financial, social and local organisation interms of principles and aims that were predestined by thebasic system. Since the foundation of the committee, manyfinancial agreements have been made. These have involvedco-operating in and unifying financial and monetaryorganisations. The Gulf Committee of Co-operation hasbecome an apparent and effective presence that reflects thedirections of the governments of the member states and theinterests of its people, believing in its united aims andsharedfate.These factors will contribute to the harmonisation ofaccounting of Zakat between countries. According to Trop(1990) accounting harmonisation reduces administrative andsystem costs by removal of unnecessary duplications of dataand published information requirements. In addition,harmonisation facilitates better information forcentralised agencies. According to Chandler (1992), theharmonising of regulatory agencies means that both tax164

authorities and securities regulators would find theirsupervisory and enforcement roles eased if nationaldifferences in financial reporting and auditing were to bereduced. Finally, the Islamic Shariah has a big influenceon harmonisation in the GCC countries because of itsprohibition of riba. Also it imposes Zakat in any tradetransaction. It was, therefore, important to investigatethe perception of respondents regarding the possibility ofZakatharmonisation.Research question (7)" What are the various perceptions, of the selectedgroups of respondents, of harmonising Zakataccounting across the GCC countries?5.2.8 Zakat collection and distributionThe principle in Islamic law states that Zakat should becollected, under strict supervision, for those who deserveit. Zakat is not merely an action left to the choice ofeach Muslim - even if it were preferred for Muslims todistribute the Zakat of their money individually. It is acompulsory obligation that the ruler allows those appointedto collect and those deserving to receive. It is a dutyfor Muslims to pay (Qur'an, chapter 9: 103).165

In Saudi Arabia, the Zakat Department is responsible forcollecting and distributing Zakat. According to theMinistry of Finance, royal decree no. 17/2/28/3321 of11/2/1950, Zakat is collected from individuals andcompanies of Saudi nationality. The basic idea for thecollection of Zakat is to be consistent with the Shariahand to allow the Zakat Department to collect Zakat, asimposed by the government of Saudi Arabia, and according toIslam, which was imposed by Allah. In 1963, decree no.61/5/1, the amount collected by Zakat Department should betransferred from the Ministry of Finance treasury to theSocial Security Institution treasury to be distributed bythem to the needy. In the other countries, no regulationhas yet been set for the collection or distribution ofZakat, so Islamic banks and charitable organisations inthose countries deal with Zakat; accepting it from anyonewho will pay it and distributing it (if requested,according to the depositors' recommendations). It was,therefore, important to investigate the perceptions of theselected respondent groups regarding Zakat collection anddistribution.Research question (8)" What are the various perceptions, of the selectedgroups of respondents, of efficient means ofcollecting and distributing Zakat?166

5.2.8 Variations in accounting measurementIn line with conventional accounting, adopted by developedcountries, accounting measurement and disclosure in theIslamic countries are flexible and allow for differentmethods to be used. Variations in accounting measurementand disclosure of Zakat are explained below.5.2.9.1 Depreciation of fixed assetsAccording to the Ministry of Finance (1988) depreciation offixed assets is considered to be a discounted expenditure,in line with Circulation No. 12025/2/1 dated 18.12.1392H,issued by the Department of Zakat and Income, provided thatthe:a) fixed assets are owned by the firm;b) fixed assets are depreciable;c) fixed assets are used in the firm's activity;d) depreciation is for one complete year, except in the casewhere an asset has only begun to be used during the year;e) depreciation is measurable according to the specifiedpercentages as a maximum limit by the department and onthe basis of cost actuality of fixed assets.167

According to Al-Sultan (1997) the treatment of fixed assetsadopted by the Saudi Department of Zakat and Income,conforms to the accountancy treatment for the depreciationof fixed assets. The latter is based on estimatingdepreciation according to rational percentages and on thebasis of the actual historical cost of the fixed assets.Consequently, the Saudi Department of Zakat and Income iscriticised, as follows, with respect to its treatment ofthe depreciation of fixed assets.1. This treatment has not complied with the criteria ofmeasurement and assessment of current cost whencalculating depreciation on the basis of the actual costof the fixed assets. Because the department has notcomplied with these criteria, when assessing the tradeactivity (working capital) at the end of the period, thiscan be regarded as an unjustified inconsistency inmeasuring elements of the Zakat pool of trade activity.2. This treatment has not complied with the criterion ofprotecting capital, since measuring the depreciation ofthe fixed assets on the basis of their actual cost lowersthe value of depreciation instalment and unjustifiablyincreases the net profits. This leads to increasing theZakat pool of trade activity and, consequently, its168

applicability to part of the capital, which meansunprotecting it. In addition, the firm's future inabilityto replace its fixed assets, using the accumulateddepreciation instalments in the accounts of depreciationof fixed assets allowances, also indicates an inabilityto protect capital as well as bringing about the firm'sinability to continue.5.2.9.2 Allowances and reservesThe Saudi Department of Zakat and Income does not allow todeduct any kind of allowances, except for depreciation offixed assets, and bad debts allowances in the bankingsector only, provided that the following are available.a) It is necessary to submit a certificate from the SaudiArabian Funds Organisation stating the amount of the debtof the allowance.b) Zakat must be levied on each collected debt and for oneyear.As for reserves, the Saudi Department of Zakat and Incomedoes not discount them at all on the basis that they do notrepresent any actual burdens or losses; so they are notused by the firms as a means of lowering their profits andaccordingly the Zakat base.169

5.2.9.3 ExpenditureThe Saudi Department of Zakat and Income excludes anyexpenditure not relating to the firm, and does not allowdiscounting them, such as personal expenditures of thefirm's proprietors. This agrees with the accountancypractices and the entity principle. Each organisationrepresents an entity, which is separate and independentfrom its owners, and from other organisation. Thus, by thisprinciple, the activity of the organisation is separatedfrom the activities of its owners. It also agrees with thestandard for measuring the Zakat base of the tradeactivity. The Saudi Department of Zakat and Income excludesany expenditure not relating to the Zakat year underconsideration, even if they were actual and supported bydocuments.5.2.9.4 Expenditure relating to previous yearsAccording to Al-Sultan (1997) the Saudi Administration ofZakat and Income excludes any expenditure not relating tothe Zakat year under consideration, even if they wereactual and supported by documents.The researcher does not agree with the Administration inthis regard since, if these expenditures are real andsupported by documents as well as relating to the firm,170

then they must be discounted since they are the firm'sdebts for previous periods, paid during the period underconsideration. Debts are generally considered as discountedelements.5.2.9.5 Wages, salaries and similar itemsAccording to (Yahya, 1988) wages, salaries and similaritems (such as awards paid out for personal services) areconsidered as deductible costs when calculating the firm'snet profits, provided that their amounts are reasonable andnot exaggerated, in accordance with the procedures observedby the Saudi Department of Zakat and Income. They shouldalso be related to the firm's activities. This also allowsdiscounting academic fees paid by firms to their employees,in the region of 5,000 Riyals per employee.According to Al-Sultan (1997), the Zakat department'saction in relation to wages, salaries and similar itemsagrees completely with accountancy procedures andprinciples; and with the Zakat pool of trade activity.5.2.9.6 End of service awardsAccording to the Saudi Organisation of Certified PublicAccountants (1997), the Saudi Department of Zakat andIncome allows the discounting of end of service awards171

payable or paid to employees, on the basis that they aredetermined according to specific rules and regulationsprovided for in the Statute of Labour and Labourers, andalso that they had been calculated on the basis of the wageat the end of employment and on the basis of the period theemployee stayed in service. If, however, the firm createsan allowance to meet spending these awards in the future,(i. e., an allowance for end of service awards) the Zakatand Income Department does not allow discounting of thisallowance. End of service awards are regarded as astatutory obligation accepted by the Department of Zakatand Income when they are actually paid to the employees.This is so that firms would not resort to creating suchallowances in an attempt to lower their profits and, hence,the Zakat pool of trade activity. It is also not possiblefor a firm to determine the end of service award of anyemployee in the firm except upon the end of his servicewhether for retirement, death or voluntary termination ofservice.5.2.9.7 Bad debtsAccording to Jamjoum (1985), the Saudi Department of Zakatand Income agrees to discount bad debts from a firm'srevenues when determining the Zakat pool of trade activitysince this agrees with accountancy practices and principles172

as well as with the standard for the estimations of theZakat pool of trade activity, in accordance with thefollowingprovisions.a) Bad debts should be real rather than false.b) A decision must be made towards cancelling these debtsfrom the concerned authority within the firm.c) The firm must have carried out the legal and actual re-claiming procedures, and more than one year must haveelapsed since these reclaims were made.d) The firm must prove the inability of the debtors to paythese debts, such as in bankruptcy cases by a judicialverdict, or in cases of debtors stopping payments due totheir insolvency; and,e) the firm has to pledge to primarily include any collectedbad debts in the future within the Zakat declaration.5.2.9.8 Fees of firm's board of directorsAccording to the Saudi Organisation of Certified PublicAccountants (1997), the Saudi Department of Zakat andIncome excludes all that members of a company's board ofdirectors obtain in terms of fees or rewards fromexpenditures and does not allow discounting them from therevenues when determining the Zakat pool of trade activity.The Zakat department justifies this action in that these173

fees or rewards are considered distribution of profitrather than a burden to it. This procedure is applicable tocompanies or sole companies, where, according to the SaudiCompanies Statute, there is a board of directors (of jointliability companies, with a number of shareholders) or apartner managing a sole corporation. In both cases,whatever the board of directors of a joint liabilitycompany (which consists of all shareholders) or a directorin a sole corporation (who is a partner) are paid, this isconsidered to be a distribution of profit rather than aburden to it, consequently it should not be discounted.This treatment has been adopted by the Saudi Department ofZakat and Income (i. e., not discounting the fees of afirm's board of directors from the revenues whendetermining the Zakat pool of trade activity; so as not touse these fees and rewards as a means to reduce profits,and, subsequently, the Zakat pool of trade activity). Itwas therefore, important to investigate the perceptions, ofthe selected groups of respondents, regarding variations inaccountingmeasurement.Research Question (9)" What are the various perceptions, of the selectedgroups of respondents, of the cause(s) of variationin measuring Zakat?174

5.2.10 Percentage of ZakatWhen Zakat is imposed, the percentage which should be paidto the collection authority is 2.5 percent of net profit.According to the Holy Qur'an:Of their wealth take alms (Zakat) so that thou mightestpurify and sanctify them; and pray on their behalf.(Qur'an, chapter 9: 103).After the discovery of oil in Saudi Arabia, the result hasbeen a significant increase in oil revenue, the Saudigovernment decreased the percentage of Zakat collectionfrom 2.5 percent to 1.25 percent and allowed 1.25 percentto be kept by companies (investors) to be distributed bythemselves. But Decree No. 76, dated 30/10/1976, SaudiArabian government imposed a Zakat percentage of 2.5percent of net profit. In the other GCC countries, noregulation governs this issue as yet. Only Islamic banks,however, deduct 2.5 percent from the reported net profitfor Zakat and distribute this to the needy. It was,therefore, important to investigate the perceptions, of theselected groups of respondents, regarding the Zakatpercentage that ought to be paid.Research Question (10)" What are the various perceptions, of the selectedgroups of respondents, of the percentage of Zakatthat ought to be collected?175

5.2.11 Shariah supervisory committee (SSC)To insure accountability and to verify that alltransactions conducted by an Islamic bank are observingShariah principles, each Islamic bank employs a SSC.Similar committees plays a major role in the Saudi ZakatDepartment by monitoring and providing advice on companiesdealing with Zakat. According to the Ministry of Finance(1988) all employees in the department monitoring Zakat areappointed by and receive salaries from the government. Inthe other GCC countries, there is no organisation whichregulates Zakat, but the Islamic banks in those countrieseach have a SSC to monitor and control all bank activitiesand transactions, especially Zakat calculation anddistribution. This committee is appointed by and receives asalary from the bank. Given that the committee is appointedby the bank, this would bring into question itsindependence, since it might be expected to be influencedby the bank authority. Management could influence thecommittee's opinion when making decisions about Zakat. Itwas, therefore, important to investigate the perceptions,of the selected respondents, regarding the appointment ofand salaries paid to the SSC.Research Question (11)" What are the various perceptions, of the selected groups ofrespondents, of who should appoint and pay for the SSC?176

5.2.12 Zakat location in the annual reportAccording to the Ministry of Finance (1988) the SaudiArabian government requests all companies to discloseinformation about Zakat in the annual report. This willhelp to ensure that Muslims know the amount of money paidto the collection agency. The location of Zakat in thefinancial report is not specified. There is no regulationyet in the other GCC countries, so financial reports do notinclude the amount of Zakat. This will affect investment inthese countries. Annual reports of Islamic banks in thosecountries show the amount of Zakat per share. It was,therefore, important to investigate the perceptions, of theselected groups of respondents, regarding the location ofinformation on the Zakat disclosed in the annual report.Research Question (12)" What are the various perceptions, of the selectedgroups of respondents, of the location of informationon the Zakat disclosed in the annual report?5.2.13 Zakat methodThe determination of the Zakat base of the trade activitydepends on a firm's financial situation and the calculationof working capital. As mentioned in the previous chapter,the Zakat base can be determined by using either the direct177

or indirect method. According to Al-Sultan (1997), thedirect method calls for analysis of the elements of theZakat base, i. e., cash, stock, debtors, creditors, andnotes payable. The indirect method calls for the analysisof the equity accounts. The two methods produce the sameamount of Zakat obligation. Both methods, however, overlookthe nature of investment in other firms, and whether thesefirms are subsidiaries to the parent company. If theseinvestments have been purchased for selling back or totrade in them, they and their Zakat base will then beincluded within the elements of the current assets andZakat should be levied. If, however, they were purchased tocontrol other subsidiary companies, they are included withthe elements of fixed assets, and any return they achieveis subject to Zakat. These two methods, for thedetermination of the Zakat pool of trade activity, suitcompanies with regular accounts. With regard to companieswith irregular accounts, however, the Zakat base can beestimated. The capital can be determined at the beginningof the year from the commercial register or the company'scontract. It may also be estimated from the activity'scurrent size'. Profits will be determined in the light ofoperations undertaken throughout the year and also othergeneral indicators. The commercial debts payable to theUsually they estimate profit as a percentage of cap 178 (10 percent of capital).

Zakat payer are added to the profits, unless he proves theunlikely hood of collecting them, or if there is a disputebetween him and the other parties. It was, therefore,important to investigate the perceptions, of the selectedgroup of respondents, regarding the Zakat accountingmethod.Research Question (13)" What are the various perceptions, of the selectedgroups of respondents, of Zakat accounting methods?5.2.14 Benefit of Zakat implementationAccording to Al-Qaradawi (1986) Zakat (alms), in thelanguage of the Qur'an and the Sunna, may be calledcharity. The root of the word charity is taken fromtruthfulness. This is why Zakat is called charity, becauseit is evidence of the truth of the belief of the one givingZakat and belief in The Day of Judgment. The Qur'an hasexpressed the religious aims for Zakat in two words;purification and sanctification.Take alms from their wealth in order to purify themand sanctify them with it. (Attawba, 103).This is because the wealth that a man gathers may not beclear (it may be from uncertain origins) or may be179

impermissible (haram), and is not purified without takingZakatout.The believer who gives Zakat lets goes of the desire forgreed and reaches success.And whosoever is saved from his own covetousness, suchare they who will be the successful. (Alhashr, 9).Zakat also reveals the meaning of purification of oneself.In payment of Zakat one realizes the meaning of being aservant to Allah The All High. A believer does not waitfor payment or other reward from whomever benefits fromZakat, but he awaits it from The Lord of His servants. Sothe giving, by a Muslim, of Zakat by himself and paying itfrom his free money (which he strongly loves) reflects thedepth of his belief and stability of his creed and wish toattain the pleasure of Allah (Al-Sultan, 1997). Whoeverdeserves and receives Zakat realizes that he is a member ofa generous human society. Zakat brings about affection,mercy and love between the members of an Islamic society.Muslim brotherhood cannot last if there exist any peoplecrying and suffering from hunger, and at the same timethere are others busy with worldly delights and desireswhich act as a fire that lights jealousy, envy and hatredin the spirits of the denied poor against the luxuriating180

ich. This is what Islam stands against, and tries toprevent. Allah says:The believers are nothing else than brothers.The Prophet said, Be servants to Allah, brothers, eachMuslim a brother to one another (Al-Qaradawi, 1986). So forthe sake of putting off the fire of jealousy and envy, andfor the sake of strengthening the elements of Islamicbrotherhood, Islam has made Zakat obligatory for the rich.This is to eradicate poverty and its harms, such as theft,corruption, and the like; to prevent crime and trading inone's honor or in drugs; until an unemployed person canfind a job, a disabled person can live with respect and onewho owes money is helped to pay it back. Thereby, the poorfeel that the money of the rich is money for them innecessities and needs, and they realize that the strengthof their brethren is a strength for them. This creates anair freshness, love and kindness between the rich and thepoor of Islamic brotherhood. In accordance with thismeaning, the messenger, May blessings and peace be uponhim,says:One of you does not fully believe until he loves forhis brother what he loves for himself.As well as Zakat being a cleansing of the spirit and asanctification of it, it is also a purification of the181

money of the one who is giving it, and a growth for himliterally and morally, as it acts as a reason for the ownerto invest and make it grow so that it would not bedissipated in payments to charity alone (this is becauseZakat is due on idle wealth and is an encouragement to makeone's wealth. work for you). This is how the Zakat money,that the poor receive, helps to increase the buying abilityfor them. This would naturally reflect on being richitself. An increase in demand for necessary merchandiseand services will lead to an increase in production of suchnecessities. This is what is mostly produced throughfinancial units owned by the rich, which increases the needfor workers. So the money of Zakat helps in eradicatingunemployment, as it provides a job for the worker andguarantees a respected life for the disabled. According toAl-Sultan (1997) Zakat is taken from the money of the rich,to give to the poor, which undoubtedly leads to a type ofdistribution of wealth. This makes the social layerscloser and prevents the amassing of wealth in the hands ofa small group, who can affect the country's finances andabilities, and which could be a cause of generalstagnation. This may lead to a slowing,. or even stopping,of production and, therefore, the main point about Zakat inthe state's development, financially, is clear; the point182

eing to make it Islamic, strong, growing and stable. Itwas, therefore, considered important to investigate theperceptions, of the selected group of respondents,regarding the potential for harmonisation of Zakat acrosstheGCC countries.Research Question (14)" What are the various perceptions, of the selectedgroups of respondents, of the potential for Zakatharmonisation across the GCC countries?5.3 Research methodologyAs mentioned in the previous section, the main purpose ofthis chapter is to provide answers to the above mentionedresearch questions. Different methods can be used tocollect data and to assist in answering these questions.The main instrument used to collect data for this study isthe questionnaire method. The following section willdiscuss the main advantages and disadvantages of thismethod.5.3.1 Questionnaire methodA questionnaire is a highly structured data collectiontechnique in which each respondent is asked the same set ofreformulated written questions. The questionnaire can183

either be posted to the respondents or self-administered.Self-administered questionnaires (and also postalquestionnaires) are more flexible than interviews sincethey are useful if respondents need to read through somematerials before completing part of the questionnaire or toconsult other staff members (Hague, 1993). It was easy totravel and self-administer the questionnaires and collectthem the same day, rather than waiting for interviews to beconducted (had this technique been adopted). This method ofdata collection ensures a high response rate within a shortperiod of time. The researcher also has the chance tointroduce the research topic and motivate individuals toparticipate in the survey. The self-administeredquestionnaire is also less expensive and less time-consuming than interviewing and requires fewer skills toadminister than to conduct interviews (Sekaran, 1992).One of the attractions of a well-designed questionnaire isthat it is impersonal (possible interviewer bias can beeliminated). Questionnaires are also economical (unlikeinterviews, they do not require trained interviewers).Aninvestigator can distribute and collect a large number ofquestionnaires within an area during the same day, insteadof spending several days interviewing the same number ofrespondents. The cost of adopting the interview method for184

the present study would have been prohibitive, due to thewide geographical area the study involved (Klimoski, 1991).The absence of an interviewer also provides greateranonymity. Anonymity may elicit a higher response ratethan that achieved during personal interviews (Nachmias andNachmias, 1996).Questionnaires are also preferable when a question demandsa considered rather than immediate answer or if answersrequire consulting personal documents or other people, incontrast to interview questions which required immediateanswers(Klimoski, 1991).Questionnaires do, however, have their own disadvantages.Postal questionnaires can be used as an instrument for datacollection only when the questions are straightforwardenough to be comprehended solely on the basis of printedinstructions and definitions (Nachmias and Nachmias, 1996).Postal questionnaires are also known to receive lowerresponse rates than interviews. The investigator canovercome this disadvantage by using Self-administeredquestionnaires(Nachmias and Nachmias, 1992).185

One of the problems associated with postal questionnairesis that people simply enter replies in wrong boxes. Humanerror could easily go uncorrected when the respondent isalone (Mann, 1985).It is also true that, in some cases, the investigator isunsure as to who has completed postal questionnaires, orwhether they have been treated seriously and objectively(Hague, 1993).There are also problems associated with poor overseas mailservices in the study area, hence it was easier and moreassured for the researcher to deliver the questionnairespersonally to all the respondents.Under the Self-administered technique, the questionnaire ispresented to the respondents with explanation of thepurpose of the inquiry, and then the respondent is leftalone to complete the questionnaire and for it to be pickedup later (Oppenheim, 1992).Having recognised the advantages of the self-administeredquestionnaire, it was felt that this method be used tocollect data for this study. It has also been widelyacknowledged that when an investigator is required to cover186

a wide geographical area, involving four neighbouringcountries.Both postal and self-administrated questionnaires aredesigned to include open- and closed-ended questions. Theresearcher has designed closed-ended rather than open-endedquestions. The advantage of closed-ended questions arethat they can be administered with little directconfrontation (Hague, 1993) and the respondent can performwith greater reliability the task of answering thequestions when response alternatives are given (Fowler,1993). Close-ended questions are also easier andrelatively quicker to answer. In fact, they require nowriting and quantification is straightforward; in otherwords, questions can be answered within a short time(Oppenheim, 1992).5.3.2 Design of the questionnaireThe questionnaire was divided into five parts which coveredthe topics of respondent profile, investment background,Zakat reporting and Zakat harmonisation. The purpose of thefirst part was to collect demographic data on somecharacteristics of each respondent. This part consisted offive questions, including age, nationality, educational187

level, previous and current job title and years ofexperience. This data can also be used to establish theimpact of a respondent's answers in other parts of thequestionnaire.The second part tried to elicit information from therespondents about their investment. It was anticipated thatinvestors would have a good knowledge of the issue of Zakatsince they pay it.The third part of the questionnaire formed the basis of theempirical survey. It was subdivided into three sections:Zakat collection, Zakat distribution and Zakat payments.Hence, this part covers all these issues. Some of the aboveissues were subdivided into further questions. Respondentswere requested to give their opinion on the way on whichZakat is collected and distributed. As far as Zakatpayment is concerned, respondents were asked whether theypay Zakat to the Department of Zakat or directly to thosein need. Respondents were also asked to express theirsatisfaction with Zakat calculation, collection anddistribution.Part four dealt with Zakat reporting. Respondents wererequested to give their opinion of how Zakat is located inthe financial report. Respondents were asked to give theiranswer with respect to who should audit and regulate Zakat.188

The fifth and last part sought the opinion of respondentsregarding the harmonisation of Zakat accounting practicesin the GCC States.The objectives of the questionnaire were briefly stated onthe questionnaire's covering letter, which also stated theconfidentiality of all information provided and that suchinformation was to be used for the purpose of the studyonly. To encourage target groups to participate and respondto the questionnaire, the anonymity of the respondents mustbe guaranteed by not asking respondents to directlyidentify their organisations.5.3.3 Pilot studyEach survey questionnaire presents its own problems anddifficulties before it reaches the final draft.Questionnaires have to be designed, and tried out, improvedand then tried out again, often several times over, untilit is certain that they can do the job for which they areintended (Oppenheim, 1992). The questionnaire for thisstudy was handed to the academic and research staff of theAccounting Department at Cardiff Business School, in orderto be reviewed and to obtain their opinion of its wording,sequence and structure. Members of the Computing189

Department were also contacted, to obtain their advicerelating to data analysis. They were also asked to review acopy of the questionnaire. The final draft of thequestionnaire was presented to the Head and all staffmembers of the Accounting Department in the Junior Collegeof Technology, Al-Ahssa, Saudi Arabia, to obtain theiropinions on the questionnaire. The final issue that had tobe dealt with, regarding the questionnaire design, was itstranslation. Because respondents might be unable, or havesome difficulties in answering the questionnaire in itsEnglish version, a bilingual questionnaire (English andArabic) was used. A copy of the questionnaire is shown inAppendix 1. As can be seen from the above, thequestionnaire was designed to suit the study objectives andthe nature of the respondents. The questionnaire was alsodesigned to be easy to answer and easy to analyse withrespect to the obtained data.5.3.4 Sample and questionnaire distributionThe ideal way of selecting a representative sample in aresearch survey is to draw or select individuals from thetarget population. The selection of such a group requires asampling frame, that is a list of all cases within thetarget population being included in the present study:190

academics, government officials, investors, and accountingfirms in the GCC countries. For the purpose of this studythe Zakat units were organisations that normally deal withZakataccounts.In this study, only four out of the six GCC countries werecovered: Bahrain, Kuwait, Saudi Arabia and the United ArabEmirates. The choice of these countries was based on theirusing Islamic law in all walks of life and transactions(especially in Saudi Arabia). Qatar and Oman were excludedfrom this study due to cost and time consumption factors.As mentioned above, the choice of the target groups wasmainly based on the groups' knowledge of Zakat calculation,collection and distribution. Groups chosen in this studyare as follows:" AcademicsThe academics selected for this study were mainly those whospecialise in accounting and finance. Through personalcontacts amongst the academic staff of the countries'universities (Bahrain university, Kuwait university,College of commerce in Kuwait, King Saud university, KingFaisal university in Saudi Arabia, and Al-Byan university,College of technology in Abu Dhabi in UAE). The researcher191

visited Accounting Departments in these universities anddistributed the questionnaires to respondents. This groupwas selected as they have knowledge of the variousaccounting, company issues as well as their knowledge ofIslam and Zakat." Government officialsOfficials from the various Ministries of Finance(specifically from the Zakat and Awgaf Departments) in theGCC countries were chosen to be included in this study asrepresentatives of the government. It must be noted thatonly Saudi Arabia has a special Zakat Departments which isresponsible for the supervision, collection anddistribution of Zakat. The researcher decided to visit allof these departments to distribute the questionnaires in anattempt to increase the rate of response." InvestorsInvestors were chosen to be included in the survey for tworeasons. They have investment in shares as property and areexpected to pay Zakat. The main places to find individualinvestors are the central share trading units in eachcommercial bank in Saudi Arabia and the United ArabEmirates or through the stock markets in Bahrain and192

Kuwait. Some individual investors can be contacted, in theGCC countries, over the telephone by central share tradingunit officers in commercial banks in Saudi Arabia and theUnited Arab Emirates or by brokers in stock markets inBahrain and Kuwait. The questionnaire survey wasdistributed to individual investors through commercialbanks during weekday working hours in Saudi Arabia and theUnited Arab Emirates and through brokers in stock marketsin Bahrain and Kuwait on the basis of personal contacts." Accounting firmsAccounting firms were chosen to be included in the surveyfor one main reason. They have experience in Zakataccounting practices in the GCC countries. Many accountingfirms in the GCC countries such as Talal Abu Gazalah andAl-Rashed were chosen for inclusion in this study becausethey had branches in the all the GCC countries and themajority of their employees had worked in more than one GCCcountry. These firms also deal with Zakat reporting andZakat location in the financial reports of companies andIslamic banks. Again, the distribution was by personalcontact to increase the response rate.193

5.3.5 Questionnaire response rateQuestionnaires were distributed to the above groups throughmy visit to all the GCC countries between early December1997 and the end of February 1998.Details of the number of questionnaires distributed and theresponse rate are summarised in table 5.1.Table 5.1Questionnaire response rateCondition Academics GovernmentInvestorsAccountingTotal %officialsfirmsDR D R D R D R D RBahrain 20 9 20 7 20 9 20 8 80 33 ToKuwait 20 10 20 9 20 11 20 9 80 39 25.0Saudi Arabia 20 11 20 11 20 12 20 15 80 49 31.0UAE 20 9 20 11 20 9 20 9 80 38 23.0Total 80 39 80 38 80 41 80 41 132011591100.0D= Distributed, R=R eturned, UAE= United Arab Emirates_It can be seen from table 5.1, that 20 questionnaires weredistributed to each of the target groups in the four GCCcountries, resulting in a population number of 320questionnaires. Out of the 320; 159 were completed andreturned, resulting in a response rate of 50 percent.Table 5.1, above, shows that 80 copies were distributed ineach country, 20 for each group.The total returned from Bahrain was 33 out of 80 (21percent), Kuwait 39 out of 80 (25 percent), Saudi Arabia 49194

out of 80 (31 percent) and the United Arab Emirates 38 outof 80 (23 percent).The total returned from academics was 39 out of 80 (48percent) as follows: 9 out of 20 from Bahrain; 10 out of 20from Kuwait; 11 out of 20 from Saudi Arabia; and, 9 out of20 from the United Arab Emirates.The total returned from government officials was 38 out of80 (48 percent) as follows: 7 out of 20 from Bahrain; 9 outof 20 from Kuwait; 11 out of 20 from Saudi Arabia; and, 11out of 20 from the United Arab Emirates.The total returned from investors was 41 out of 80 (51percent) as follows: 9 out of 20 from Bahrain; 11 out of 20from Kuwait; 12 out of 20 from Saudi Arabia; and, 9 out of20 from the United Arab Emirates.The total returned from accounting firms was 41 of 80 (51percent) as follows: 8 out of 20 from Bahrain; 9 out of 20from Kuwait; 15 out of 20 from Saudi Arabia; and, 9 out of20 from the United Arab Emirates.195

N ; _,5.4 Statistical analysis5.4.1 Descriptive statisticsOnce the data are collected, the first step is to describeit using statistical measures such as the mean and median(central tendency), and standard deviation (variation).Mean; this is usually computed as follows:1"where:X= the mean;N= the total number of observations in the sample; and,Xj= 1,2,3.... N.The idea is that for a particular item on thequestionnaire, the mean value is computed that underscoresthe respondents' behaviour with respect to the statedresearch question and/or hypothesis. The questionnaire usedin this study utilises a five point scale in the majorityof questions and a two point scale in the others, where onerepresents the lowest point and five the highest point.The researcher also ranked respondents' average responsesto a problem or an issue in order. For example, a responsewith a mean score of 4.6 is ranked higher than a responsewith a mean score of 3.6. This ranking represents thestrength of responses in terms of important to not196

important, or agree to disagree. The rank order isparticularly important for this study in that it indicatesrespondents' opinions in terms of their perceptions of theimportance of a specific problem or an issue and theirpreferred solutions from the alternatives provided.The second moment used is the standard deviation. This isusually computed as follows:where:S=I_/'n-12S= the standard deviation;X= the mean;N= the total number of observation in the sample; andX;= 1,2,3,.... N.The idea was to generate an indicator to measure the spreadof individual responses within a particular distribution(that is, responses to a specific question). Thus, theprobability distribution of the standard deviation of therespondents' answers measures how much the outcomes canvary above or below the expected outcome of the mean.Other statistical indicators were also computed, namely themedian, and the maximum value and the minimum value, orrange. The idea was to provide benchmark indicators againstwhich the mean and standard deviation were to beinterpreted.197

5.4.2 Statistical testsTesting is critical in statistical analysis. While thedescription of data gives some information and ideas abouta questionnaire, only testing gives a clear answerregarding a given question. The test generally depends onthe nature of the data at hand.In the present research, four groups took part. The groupswere independent of each other and their perceptions weremeasured on an ordinal scale. For these conditions,statisticians suggest a set of statistical procedurescalled a non-parametric test. Since there are more than twoindependent groups in this research the appropriatestatistical test is called the Kruskal-Wallis test. TheKruskal-Wallis One-way Analysis of Variance was computedusing the following formula:KW=k12ýrrý(RýN(N -RlZ+ 1) 1OR198

KW=12LNNk2 I+ 1) j=1Ellýj-3(N + 1)where:KW =the Kruskal-Wallis;K= number of samples or groups;Ili = number of cases in the jth sample;N= number of cases in the combined sample;R1 = sum of ranks in the jth samples or group;Rj = average of ranks in the jth samples or group; and,R=N1ý2= the average of ranks in the combined sample.This test is the non-parametric version of the parametricAnova test for calculating difference in the populationmean. The Kruskal-Wallis One-way Analysis of Variancetests the hypothesis that K independent groups or samplesare the same against the alternative hypothesis that one ormore of the groups differ from the others. When theobtained value of the Kruskal-Wallis One-way Analysis ofVariance is significant, it indicates that at least one ofthe groups is different from at least one of the others(Siegel and Castellan, 1988).All the statistics are calculated using SPSS, whichprovides the value of the statistic and the critical valueP. In general; the 5 percent level is widely accepted as areasonable level of significance.199

5.5 SummaryThis chapter has detailed the research methodology used toconduct the current study of Zakat accounting under therules of the Shariah. The decision was made to collect therequired data by use of a questionnaire. After carefulstudy and consultation with academic staff and the computercentre at Cardiff University and the Junior College ofTechnology in Al-Ahssa, Saudi Arabia, the questionnaire wasdistributed in December 1997. The researcher leaving the UKto undertake field work in the GCC countries.The target groups, to receive questionnaires, among thepopulation chosen were academics, government officials,investors and accounting firms.The structure of the tests used, among other things, werestatistical moments or descriptive, Kruskal-Wallis test, todiscover the nature of the respondents' perceptions andbehaviour, and the degree of difference between the foursamples. The forthcoming chapter will present the findingsof the study.200

ChaptersixStatisticalanalysisofthesurveystudy

ChaptersixStatistical analysis of the survey study6.0 IntroductionChapter six discussed the process used to obtain theresearch data, and provided an overview of the statisticalprocedures employed in handling the data for subsequentanalysis and interpretation. In this chapter, the results ofthe empirical investigation are presented, analysed andinterpreted. Data were analysed according to thestatistical methods outlined in the methodology chapter.This chapter proceeds as follows. While section 6.1discusses the personal characteristics of respondents,section 6.2 comprises the discussion of the major findings.Section 6.3 discusses the suggested method for Zakataccounting, and section 6.4 presents furtherrecommendations. The last section (6.5) concludes thechapter with a brief summary of the main findings.6.1 Personal characteristics of respondentsThis section presents the personal characteristics of therespondents. Each respondent was asked Five basic questionsrelating to age, nationality, level of education, jobposition and length of previous and current employment. The201

analysis of respondents background is provided in table6. la.It can be seen from table 6.1a that more than 67 percent ofthe respondents were between 30-50 years old. The tablefurther reveals that 21 percent of the respondents are lessthan 30. Only 1 percent of the respondents was found to beabove 60 years of age. Given that the majority ofrespondents are more than 30 years old, this will givecredibility to their answers because of their high level ofexperience and maturity. Table 6.1a also reveals that allrespondents are nationals of the countries surveyed whichstrengthens the validity of the questionnaire as allrespondents are directly concerned with the subject of thesurvey. The distribution of respondents among the fourcountries is fairly proportionate in order to make thesample more representative of the population of study. Thelargest country (Saudi Arabia) is represented by themajority (30 percent) of the respondents, while the othersmaller countries are represented by 25 percent (Kuwait), 24percent (UAE) and 21 percent (Bahrain) respectively. As thepresent study is more concerned with obtained informedopinion, education of respondents is of paramountimportance. Table 6.1a shows that more than 91 percent ofthe respondents hold a bachelor's degree or above with theother 9 percent holding a relevant diploma and high school202

certificates. The result indicates that the majority ofrespondents are highly educated and would, therefore, bemore able to understand the questionnaire and give anobjective opinion. It is possible that the place ofeducation may affect the opinion of the respondent. If therespondent has was educated in an Islamic country, it may bethought that the respondent might be biased towards a moretraditional attitude towards zakat. On the other hand, arespondent who was educated in the West may have more of aliberal attitude. Thus, in order to limit the possibility ofbias, the sample should be fairly represented by bothgroups. Table 6. la indicates that 42 percent of respondentshold degrees from Arab countries, and 30 percent obtainedtheir degrees from GCC countries. The possibly liberalrespondents are also represented, with 28 percent ofrespondents holding degrees obtained from Western countries.Table 6.1a background characteristics of respondentsBahrain Kuwait Saud i Arabia United Arab emirates TotalAge F P F P F P F P F PLess 30 years 5 15% 6 15% 13 27% 10 26% 34 21%31-40 years 15 46% 7 18% 14 28% 10 26% 46 29%41-50 years 13 39% 16 41% 17 35% 14 37% 60 38%51-60 years 0 0% 10 26% 4 8% 3 8% 17 11%More than 60 years 0 0% 0 0% 1 2% 1 3% 2 1%Nationality 33 21% 39 25% 49 30% 38 24% 159 100%Academic qualificationsLess than high school 0 0% 0 0% 0 0% 0 0% 0 0%High school 2 50% 1 25% 1 25% 0 0% 4 3%Diploma 0 0% 3 30% 6 60% 1 10% 10 6%Bachelor degree 18 20% 21 23% 26 29% 25 28% 90 56%Master degree 7 20% 10 29% 11 31% 7 20% 35 22%PhD 6 30% 4 20°rä 5 25% 5 25% 20 13%Country of educationUK 6 30% 5 25% 2 10% 7 35% 20 13%USA 4 21% 6 32% 4 21% 5 26% 19 12%Other European country 2 40% 2 40% 1 20% 0 0% 5 3%GCC country 11 23% 11 23% 23 48% 3 6% 48 30%Other Arab country 10 15% 15 22% 19 29% 23 34% 67 42%203

Education and age are not the only important features ofrespondents. Occupation is equally important as itrepresents the interest of the respondents in the subjectunder examination. Thus, although the statistical testingincludes only four groups of occupation (academics,government officials, investors and accounting firms), itwould be of interest to further investigate the specificoccupation of respondents since descriptive statistics donot limit the number of sub-groups. Separate questions aboutthe specific occupation and length in previous and currentoccupation were included in the questionnaire.Unfortunately, there were many missing answers as some ofthe occupations were not anticipated by the researcher andwere, therefore, excluded from the analysis.In addition, table 6. lb reveals that the sample includes awide variety of occupations, all of which are directly orindirectly linked to the question of Zakat. As the main areaof the present study is accounting, accountants arerepresented heavily with the highest proportion in thesample (34 percent). Academics interested in Islamiceconomics and in Zakat accounting are also important andwere represented by 24 percent. Government officials,auditors, and other occupations are also represented with atotal of 42 per cent. It is -noted again that thesepercentages were calculated on the basis of non-missing204

esponsesonly.The wide range of posts occupied by respondents lendscredibility to their opinions. This result allows forvariations in their answers and makes them more acceptable.Table 6.1bOccupation and Experience of the respondentsBahrain Kuwait Saudi Arabia United Arab emirates TotalFP FP FP FP FPPrevious post:Company director 1 33% 1 33% 0 0% 1 33% 3 7%Accountant 4 18% 7 32% 7 32% 4 18% 22 49%Government official 0 0% 4 50% 0 0% 4 50% 8 18%Auditor 0 0% 1 20% 2 40% 2 40% 5 11%University lecturer 1 50% 0 0% 0 0% 1 50% 2 4%Stock market official 0 0% 0 0% 0 0% 0 0% 0 0%Banker 3 60% 1 20% 0 0% 1 20% 5 11%Financial analyst 0 0% 0 0% 0 0% 0 0% 0 0%Period oftime previous post was held:Less than one year 0 0% 4 50% 3 37.5% 1 12.5% 8 21%1-5 years 3 20% 6 40% 3 20% 3 20% 15 38%6-10 years 1 11% 1 11% 1 11% 4 67% 9 23%More than 10 years 3 43% 2 29% 1 14% 1 14% 7 18%Current post:Company director 0 0 0 0 0 0 1 100% 1 7%Accountant 10 21% 9 19% 24 51% 4 9% 47 34%Government official 5 26% 6 32% 5 26% 3 16% 19 14%Auditor 4 21% 4 21% 3 14% 8 42% 19 14%University lecturer 6 18% 9 26% 9 26% 10 30% 34 24%Stock market official 2 29% 2 29% 2 29% 1 13% 7 5%Banker 3 50% 1 16.6% 1 16.6% 1 16.6% 6 4%Financial analyst 2 33% 3 50% 1 16.6% 0 0% 6 3%Period of time current post is hel d.Less one year 3 19% 6 38% 5 31% 2 12% 16 13%1-5 5 16% 5 16.5% 10 32% 11 35% 31 25%6-10 4 13% 10 33.3% 10 33.3% 6 20% 30 24%More than 10 years 12 25% 9 19% 20 43% 6 13% 47 38%F= Frequency P= PercentageFinally, table 6. lb provides information on the respondents'current posts and total length of employment. The analysisindicates that the highest percentage (38 percent) of therespondents had been in their present posts for more than 10years. The table also indicates, however, that 38 percent ofthe respondents had been in their previous job between 1-5205

years. Twenty-three percent revealed that they had occupiedtheir previous posts for between 6-10 years. Twenty-onepercent, however, said that they had remained in previousposts for less than one year. It is obvious that themajority had gained experience of between 5-10 years of workand this implies that the respondents who participated inthis study were in a good position to give informed opinionson Zakatissues.6.1.1 Investments and their valuesThis question required respondents to identify the value oftheir investments according to the following categories:less than US$5,000; US$5,001-10,000; US$10,001-15,000; and,aboveUS$15,001.Table 6.2Respondents' investments and their valuesDo you holdBahrain Kuwait Saudi Arabia United Arab emirates TotalinvestmentsF P F P F P F P F PYes 6 10% 17 28% 18 30% 19 32% 60 38%No 27 27% 22 22% 31 31% 19 20% 99 62%Kind of investmentCompany shares 1 2.7% 12 33% 10 28% 13 36.3% 36 46%Government bonds 0 0% 0 0% 3 100% 0 0% 3 4%Islamic bank 3 33% 3 33% 2 22.2% 1 11.8% 9 11%Land 1 7.1% 3 21% 3 21.4% 7 50% 14 18%National bank 4 24% 6 35% 4 23.5% 3 17.5% 17 21%Investment valuesLess than US$5,000 2 13% 5 31% 5 31% 4 25% 16 18%US$5,001-10,000 0 0% 2 13% 5 33% 8 54% 15 16%US$10,001-15,000 0 0% 1 17% 2 33% 3 50% 6 7%US$15,001 and over 9 17% 16 30% 9 17% 10 36% 54 59%Investment yearsLess than one year 0 0% 2 33% 3 50% 1 17% 6 10%1-5 2 7% 7 25% 9 32% 10 36% 28 48%6-10 1 8% 6 46% 2 15% 4 31% 13 21. %More than 10 years 3 23% 2 15% 4 31% 4 31% 13 21%F= Frequency P= PercentageTable 6.2 shows that 38 percent of the respondents heldinvestments. Of those who held investments, a significant206

proportion of them (46 percent) invested in company shares.A reasonable proportion of the respondents indicated thatthey had invested in the banking sector. Only 11 percent ofthe participants indicated that they invested in Islamicbanks. Investment in government bonds registered the lowestpopularity with only 4 percent of the respondents indicatingthat they had investments in bonds. It is important tomention, however, that only Saudi Arabia, from among the GCCcountries, issues government bonds; having been recentlyintroduced by the Saudi government. Hence, it will take timefor the Saudi investors to gain their benefits. A majorproportion of the participants (59 percent) indicated thatthey have invested more than US$15,000. Eighteen percent ofthe respondents revealed that they had invested less thanUS$5,000. A high percentage of the respondents (48 percent)claimed that they had been holding their investments forbetween 1-5 years. Twenty-one percent of them said that theyhad been holding their investments for more than 10 years.The results indicate that Gulf investors prefer to hold onto their investments. Given that the majority of theparticipants claimed they invest in shares, this wouldrestrict share circulation. This result is in line withNaser's (1998) findings; that share investors in the Gulfregion tend to buy shares and keep them for a long time.207

6.2 Major results6.2.1 Zakat payment on investment returnsRespondents who indicated that they hold investments wereasked whether they pay Zakat on the returns from theirinvestments. The respondents were also asked to indicatetheir opinion about whether or not to enforce paying Zakaton returns from investment activities. The answers to thesequestions are summarised in table 6.3 below.Table 6.3Zakat payment on investmentsDo you pay Zakat? BA KU SA UAE TotalF % F % F % F % F %Yes 6 10% 17 28% 18 30% 19 32% 60 100%No 0 0% 0 0% 0 0% 0 0% 0 0Zakat should be enforcedon investment activitiesYes 1 3% 10 27% 16 43% 10 27% 37 62%No 5 22% 7 30% 2 9% 9 39% 23 38%BA= Bahrain, KU= Kuwait,SA= Saudi Arabia, U AE= United Arab Emirates, F= Freq uencyAs can be seen in table 6.3, all respondents indicated thatthey pay Zakat on returns from their investments. Sixty-twopercent of the respondents supported the proposal thatpaying Zakat to the Zakat Department should be madecompulsory on investment returns.6.2.2 Factors obstructing the payment of Zakatto the governmentSince it was expected that a significant number of the208

espondents would oppose imposing Zakat on investmentactivities, it was important to ask respondents for opinionsregarding factors that might be behind their objections.These respondents were provided with four possibleconsiderations and were asked to express the extent of theiragreement to each item.The overall result indicates a strong agreement between allsub-groups (with the four suggested factors) for notpreferring to pay Zakat directly to the government. As canbe seen from the mean responses to the questions, thestrongest reason appears to be that the respondents believethat Zakat is a direct responsibility of the Muslim towardsAllah. It is a duty which a person should carry out withoutthe interference of a third party. The second strongestreason, as can be seen from the ranking of the means in thefourth column, is the preference of the respondents to payZakat themselves. This is typical of Muslims today, despitethe fact that, traditionally, Zakat was paid to the state inthe time of the Prophet Mohammad (pbuh) and also during theearly periods of the Islamic Caliphate. Possible reasons forthis attitude is that Muslims have not had a unified stateand, possibly more significant, most Muslim countries hadbeen colonised for centuries. Thus, Muslims habitually payZakat directly to the needy without relying on thegovernment for distribution. This issue was raised by209

Al-Sultan (1997) who argued that Muslims prefer to pay Zakatvoluntarily directly to the needy without any mediation.There is also strong agreement with the item I do not trustthe company. The reason for this seems to be that companiestend to avoid paying Zakat by manipulating expenditurefigures. The least agreed upon item was I do not trust theDepartment of Zakat. The mean was 3.73, but the minimum andmaximum were found to be 3 and 4 respectively so, althoughthere is general agreement with the item, none of therespondents strongly agreed with it. From this it can bededuced that the respondents' mistrust of the companies isstronger than their mistrust of the Department of Zakat.Although there is a general tendency to agree with the fourreasons for abstaining from paying Zakat to government, itis important to assess whether there is a difference inopinion amongst the various sub-groups. These includeacademics (AC), government officials (GV), investors (INV),and accounting firm employees (AF).Table 6.4(a)Reasons behind not paying Zakat to GovernmentFreq. Mean Rank sub-group mean by employment SD MIN MAX Chi-sq P. valueAC GV INV AFZakat is a 23 4.96 1 5.00 5.00 4.86 5.00. 209 4 5 2.29 . 515relationshipbetween theperson andAllahI do not trust the 23 4.39 3 4.67 4.33 4.43 4.00companyI do not trust the 23 3.73 4 3.67 4.17 3.17 4.00Dept of ZakatevaluationI like to pay 23 4.83 2 4.83 5.00 4.57 5.00Zakat myselfAC= academics G V= governments INV= investors AF= accounting firms. 583 3 5 2.75 . 432. 703 3 4 7.39 . 060. 388 4 5 5.04 . 169210

The results indicate that there has been no significantdifference of opinion between the selected groups. This isreflected by the chi-square. The mean for each group can beeasily seen from table 6.4(a) where it find that the mean is5 for AC, GV, and AF, while the INV group is 4.86 withregard to the first item (all respondents in thesesub-groups strongly agree) .This was not unexpected, sincethe item refers in a direct way to the belief of therespondent. The same conclusion applies to the second andthird items. There does, however, appear to be a significantdifference in attitude in the third item (I do not trust theDepartment of Zakat evaluation). The chi-square statisticequals 7.39 which is significant at the 6 percent level butnot significant at the widely accepted 5 percent level.Nevertheless, AF and GV have reported higher means than ACand INV. This suggests that accounting firm employees' andgovernment officials' distrust is greater than that ofacademics and investors. A possible explanation for thisdifference in opinion may be due to the fact that AF and GVare more involved with the Department of Zakat and may havesome knowledge about the method and practice of evaluationby the Department of Zakat. Obviously, their dissatisfactionwith the department's evaluation is translated, in thisquestionnaire, into a strong agreement with the item.Investors and academics also show little trust of the211

Department of Zakat, but not to the same level as the othertwo sub-groups. Again, this is probably due to the lack ofcontact with the department.Table 6.4(b)Reasons behind not paying Zakat to GovernmentFreq Mean Rank Sub-group mean by country SD MIN MAX Chi-sq P. valueBA KU SA UAEZakat is a 23 4.96 1 5.00 5.00 5.00 4.89. 209 4 5 1.56 . 670relationshipbetween theperson and AllahI do not trust the 23 4.39 3 4.40 4.29 5.00 4.33. 583 3 5 2.64company. 451I do not trust the 23 3.73 4 4.40 4.00 3.00 3.25. 703 3 5 12.00 Dept. of Zakat. 007evaluationI like to pay Zakat 23 4.83 2 4.80 5.00 5.00 4.67myselfBA= Bahrain KU= Kuwait SA= Saudi Arabi a UAE= United Arab Emirates. 388 4 5 3.36 . 340Next it is important to see whether there are differencesbetween GCC countries regarding the four question itemsdiscussed above. The general view of respondents is the sameas discussed previously. Table 6.4(b) showed consistencyamong the respondents of the GCC countries who took part inthis study. The majority either agreed or strongly agreedthat Zakat is a relationship between a person and Allah andit should be paid directly without any mediation. Inaddition, the respondents either agreed or strongly agreedthat they do not trust companies because the companies tryto avoid paying Zakat.As for the differences, the statistical tests (reflected bychi-square) reveal similar results as before. In the first,second and fourth items it is clear that there is nodifference in opinion between the four countries. Chi-square212

in the three items were insignificant, suggesting that thesmall differences in the means of the four countries are dueto chance and not to statistically significant differences.Significant differences, however, are found between theparticipants when they were asked whether they trusted theDepartment of Zakat. This can be clearly seen by thereported chi-square, which is highly significant, even atthe 1 percent level. In this respect, it is important tomention that of the four GCC countries covered in this studyonly Saudi Arabia has a Department of Zakat. For the othercountries, however, charitable organisations and Islamicbanks carry out the same tasks of the Saudi Department ofZakat, with the exeption that the payment of Zakat to themis not compulsory. Because of this similarity, thecharitable organisations and Islamic banks as a proxy to theDepartment of Zakat were used. The respondents from thethree other countries (where this adjustment applied) wereinstructed to use this proxy. An examination of the meansstrongly supports the significance of the test. Theresondents means are roughly divided into two groups.Bahrain and Kuwait have means of 4.4 and 4 respectively,while Saudi Arabia and the UAE have 3 and 3.25 respectively.Clearly, the distrust is greater in the first two countries.The striking difference is that not all-Saudi respondentsactually gave an opinion since they ticked the indifferent213

ox. It is highly likely that the respondents were wary ofthe religious and governmental status of the Department ofZakat. Historically, Saudi respondents involved in similarsurvey activities have been reluctant to answer questions ofthis type. It would appear that this reluctance may havebeen translated, in this case, into a belief that agreeingthat they do not trust the Department of Zakat might causethem social or even political problems because they would bedirectly and clearly criticising a government, as well as areligious institution in a country which is highlyreligiously conservative. Since, however, none of the Saudirespondents disagreed with the third item, it might bereasonable to assume that they implicitly expressed theirdistrust of the Department of Zakat by not disagreeing withthe item. In the more liberal countries of Kuwait andBahrain, the respondents expressed a clear view by agreeingwith the item. For the UAE, although the state is more orless liberal, the population (especially in Abu Dhabi) ishighly conservative, and this explains why the UAE mean isclose to that of Saudi Arabia.6.2.3 Collection of ZakatThe Shariah gives a governor the right to collect Zakat.Hence, it was vital to seek the respondents' opinions as towho should collect Zakat. The respondents were provided with214

a list of means of Zakat collection and invited to registertheir degree of agreement with each of the listed items. Theresults are presented in table 6.5(a).Table 6.5(a)Who should collect ZakatZakat should be Freq. Mean Rank sub-group mean by occupation SD MIN MAX Chi-sq P. valuecollected by AC GV INV AFGovernment 159 3.96 1 3.59 4.23 4.07 3.88 1.28 1 5 5.69. 127(Dept. of Zakat)Islamic banks 159 3.22 3 2.97 3.05 3.56 3.27 1.27 1 5 5.46. 141National banks 159 2.07 4 1.92 2.21 2.05 2.10 1.04 1 5 2.21. 530Charitable 159 3.60 2 3.44 3.66 3.63 3.66 1.21 1 5. 314 . 957organisationsAC= academics G V= govemments IN V= investors AF= accounting firmsThe overall result indicates that the vast majority of therespondents nominated the government (Zakat Department) as asuitable body to collect Zakat. This result is in line withthe Shariah rules. The overall mean for the Department ofZakat is 3.96, ranking it first. The second highest mean isfor charitable organisations, with 3.6. Thus, although mostrespondents agree with the suggestion that charitableorganisations are suitable for collecting Zakat, the supportfor them is not as strong as for the government. Islamicbanks come third with little support from respondents. Thisis possibly due to the respondents' view that Islamic banks,due to their commercial nature and lack of sufficientcoverage in terms of branches, are not well equipped to dealwith the collection of Zakat. The Islamic bank, however,does collect and distribute the Zakat from its ownshareholders. A clear shift of opinion is found with respect215

to the national banks where the mean is 2.07 (2 = disagree).Thus, there is a clear disagreement with the suggestion thatcommercial (interest based) banks could collect Zakat. Themost obvious reason for this disagreement is that nationalbanks are based on interest, which Islam clearly condemns.Thus, it is not acceptable, from the Muslim respondents'point of view that an organisation dealing in unlawful(sinful) transactions should be allowed to carry outreligious transactions at the same time. Despite the factthat national banks have a huge network of branches, fastand effective computerised connections, and most have openedIslamic windows, it is unlikely that Muslim opinion,regarding relationships between the national banks and theZakat, will change in the near future.The chi-square test for difference in means clearly shows nosignificant difference in all four organisations(government, Islamic banks, national banks and charitableorganisations). Although it can be seen from table 6.5(a)some slight variations in the means of the four groups (AC,GV, INV and AF), the statistical significance indicates thatthese are highly likely to be due to chance.In Saudi Arabia, the Zakat Department is responsible forcollecting and distributing Zakat. According to the Ministryof Finance, royal decree no. 17/2/28/3321 of 11/2/1950, Zakatis collected from individuals and companies of. Saudi216

nationality. The basis for this approach to the collectionof Zakat is to be consistent with the Shariah and to allowthe Zakat Department to collect Zakat (which is imposed bythe government of Saudi Arabia). According to Islam this wasimposed by Allah. In the other GCC countries (Bahrain,Kuwait and the United Arab Emirates), no regulation has yetbeen set for Zakat, so Islamic banks in these countries dealwith Zakat and accept Zakat from any one who will pay it.The distribution is then based either on the bank's decisionor on the Zakat payer's recommendation. Charitableorganisations in these three countries also carry out thesame task of collecting and distributing Zakat.When the sample by country grouped, the general attitudetowards the four types of organisations does not change. Ascan be seen from table 6.5(b), the ranking of the overallmeans do not change in comparison to table 6.5(a).Table 6.5(b)Who should collect ZakatZakat should be Freq. Mean Rank Sub-group mean by country SD MIN MAX Chi-sqcollected by BA KU SA UAEP. valueGovernment 159 3.96 1 3.64 3.87 4.24 3.97 1.28 1 5 4.30(Dept. of Zakat). 230Islamic banks 159 3.22 3 3.00 3.05 3.39 3.37 1.27 1 5 3.06. 383National banks 159 2.07 4 2.33 1.90 1.96 2.16 1.04 1 5 2.59-. 460Charitable 159 3.60 2 4.00 3.36 3.1 3.61 1.21 1 5 7.78. 051organisationsBA= Bahrain KU= Kuwa it SA= Saudi Arabi a UAE= United Arab EmiratesThe government is still ranked first, with national banksstill the least favoured body for collecting the Zakat.Respondents from the four GCC countries seem to have thesame attitude, since the chi-square statistic for the217

difference in means is highly insignificant for the firstthree institutions. The sub-group by country mean in thefirst item (Department of Zakat) suggests that Saudi Arabianrespondents are strongly in favour of the Department ofZakat while Bahrainis are relatively less favourablyinclined towards government controlled collection than arethe other three countries. On the other hand, Bahrainrespondents thought that charitable organisations are thebest candidates to collect Zakat. This difference betweenBahrain respondents with other GCC countries respondents maybe due to the fact that the majority of the population inBahrain are Shiite and may follow different traditions ofcollecting and distributing Zakat. Moreover, Zakat inBahrain is currently collected and distributed by charitableorganisations. Favouring charitable organisations overgovernmental institutions and banks may highlight successfulexperiments there, based on the differences in Islamicmethodology mentioned earlier.The respondents disagreed with giving the national bankssupport to collect Zakat, as can be seen from the very lowmean of 2.07. These banks deal with riba (they pay andreceive interest) which is prohibited by the Islamic Shariahand, therefore, cannot be viewed by Muslims as being morallyfit to carry out such a religious duty.While the attitude does not differ significantly towards the218

government (strongly in favour), Islamic banks (in favour)and national banks (against), significant differences ofopinion were found when dealing with charitableorganisations. Although all countries are in favour, Bahrainis the most in agreement (mean = 4.0), Kuwait is the leastin agreement (mean = 3.36), while Saudi Arabia and the UAEare in the middle with means of 3.51 and 3.61 respectively.The chi-square is significant with a significance level of5.1 percent, which is close to the 5 percent level. It can,therefore, be said that the difference in means betweencountries regarding the attitude towards charitableorganisations is not due to chance but due to some otherfactors. So far Saudi Arabia and the UAE respondents havevery close means due to the homogeneity of the twocountries' populations. Both countries have a conservativepopulation with the vast majority being from the Sunni sect.Bahrain is the least conservative with 75 percent of thepopulation being from the Shiite sect. Kuwait is slightlymore conservative than Bahrain with a strong Shiiteminority.6.2.4 Who should distribute Zakat?As mentioned in the previous chapter, the Zakat base is 2.5percent of Muslims wealth. Due to a surplus of oil revenue(that reached its peak in the 1970s) the government used to219

collect and distribute only 1.25 percent. The other 1.25percent was left to Zakat payers to distribute, providedthat the Zakat payer provided documents to prove thepayment. This procedure was changed in 1984 when thegovernment decided to collect and distribute the entireamount (2.5 percent). It was, therefore, important to askthe respondents' opinion on who should distribute Zakat. Asummary of the respondents' opinion is presented in tables6.6(a) and 6.6 (b).The earlier analysis indicated that a significant proportionof respondents supported the proposal that Zakat should becollected by the Department of Zakat (government). Theranking of the means in these two tables is similar to thosein the previous two tables concerning the collection ofZakat.Table 6.6(a)Who should distribute Zakat?Zakat should be Freq. Mean Rank sub-group mean by occupation SD MIN MAX Chi-sq P. valuedistributed by AC GV INV AFGovernment 159 3.98 1 3.72 4.32 4.05 3.85 1.25 1 5 3.60. 307(Dept. of Zakat)Islamic banks 159 3.18 3 2.95 3.24 3.42 3.12 1.33 1 5 2.58. 460National banks 159 1.99 4 1.80 2.18 1.93 1.88. 983 1 5 5.14 . 162Charitable 159 3.70 2 3.54 3.76 3.66 3.85 1.21 1 5. 625 . 891organisationsAC= academics GV= governments INV= investors AF= accounting firmsIt can be seen from table 6.6(a) that a high proportion ofthe respondents supported the proposal that the Departmentof Zakat, with a mean of almost 4, is a suitable candidateto distribute Zakat. The respondents also recommendedcharitable organisations as candidates to distribute Zakat,220

with the second highest mean of 3.70. The result can beexplained on the grounds that distributing Zakat is anexpensive exercise and the government can afford it.Charitable organisations seem to be suggested by theparticipants since these organisations work closely withvarious sections of the society and they are placed in abetter position than the government agencies to identify theneedy. Islamic banks have insufficient infrastructures tosupport the distribution of Zakat. Most respondents disagreethat national banks should distribute Zakat. This is due tothe riba (interest) problem discussed previously.The chi-square statistics were insignificant for all fouritems at the 5 percent level. Thus, there is nostatistically significant difference in the attitudes of AC,GV, INV and AF groups towards the institutions that shoulddistributeZakat.Table 6.6(b)Who should distribute Zakat?Zakat should be Freq. Mean Rank Sub-group mean by country SD MIN MAX Chi-sq P. valuedistributed by BA KU SA UAEGovernment 159 3.98 1 3.67 3.92 4.22 4.00 1.25 1 5 3.04. 385(Dept. of Zakat)Islamic banks 159 3.18 3 2.91 3.03 3.41 3.29 1.33 1 5 4.08. 253National banks 159 1.99 4 2.06 1.92 1.76 2.11. 983 1 5 2.08 . 555Charitable 159 3.70 2 3.97 3.62 3.70 3.58 1.21 1 5 3.07. 381organisationsBA= Bahrain KU= Kuwa it SA= Saudi Arab ia UAE= United Arab EmiratesTable 6.6(b) indicates that all countries surveyed in thisstudy, except Bahrain, strongly supported the Department ofZakat (government) as a candidate for distributing Zakat.221

The ranking of institutions' means is identical to theprevious table. The chi-square statistics are allinsignificant, even at the 20 percent level. This stronglysuggests that there is no significant difference in attitudebetween the four countries.Although the table reveals that respondents from Bahrain doprefer charitable organisation over the Department of Zakat,this can be explained on the grounds that Zakat is notregulated in Bahrain and charitable organisations arecurrently responsible for collecting and distributing Zakat.From the table, similarities of respondents' answers fromSaudi Arabia and the United Arab Emirates can reiterated.Kuwait and Bahrain are also similar, but to a lesser degree.Because national banks deal with riba (interest), they donot receive much support from respondents from the fourcountries surveyed countries.6.2.5 The percentage of Zakat that should be paidIn an attempt to identify the percentage of Zakat thatshould be paid to the collection authority, a list ofchoices were given to the respondents to express the extentof agreement and disagreement. Analyses of their answers byoccupation and by country are reported in tables 6.7(a) and6.7(b)respectively.222

Table 6.7(a)Percentage of Zakat that should be paidPercentage of Freq. Mean Rank Sub-group means by occupation SD MIN MAX Chi-sq P. valueZakat thatAC GV INV AFshould be paidto collectionauthority25% of the total 157 2.76 4 2.60 2.79 2.69 2.98. 948 1 5 2.95 . 399amount of Zakat50% 154 3.18 3 2.70 3.32 3.28 3.40 1.10 1 5 10.9. 01275% 155 3.22 2 2.87 3.49 3.20 3.33 1.10 1 5 6.53. 088100% 154 3.48 1 2.97 3.97 3.68 3.30 1.41 1 5 11.3. 010AC= academics G V= governments INV= investors AF= accounting firmsIt is evident from tables 6.7(a) and 6.7(b) that therespondents involved in this study are mostly in favour ofpaying the whole amount of Zakat to the collectinginstitution. This can be seen from the overall item mean of3.48 with rank 1. As the percentage reduces, the level ofagreement is also lowered, thus, the responses amounting to75 percent, 50 percent and 25 percent produce means rankingof 2nd, 3rd and 4th respectively.The overall means do not, however, reveal the whole picturesince there are differences of opinion among the sub-groups.Indeed, from table 6.7(a), the chi-square statistics for thedifference in means is significant at the 5 percent levelfor the second item (50 percent), significant at the 10percent level for the third item (75 percent), and highlysignificant at the 1 percent level for the fourth item (100percent). This suggests that the differences in attitudetowards what percentage should be paid to the collectinginstitution differs among the sub-groups (AC, GV, INV and AF).Look at the sub-group means deduces several points.223

Firstly, occupation seems to affect attitude towards thepercentage of Zakat to be paid. Academics and governmentofficials have the same ranking in means (100,75 and 50).There is a clear difference between the two. The means inthe government officials are all high (suggesting strongagreement), while the means of the academics are all lessthan 3, suggesting disagreement. A possible reason for theacademics' disagreement is their opposition to paying Zakatto the authorities. The result indicate that most academicsstrongly agreed with the reasons for not paying Zakat, asmentioned in tables 6.4(a) and (b). It is not surprising,therefore, that most academics would disagree with, or beindifferent to, this question of what percentage should bepaid. Government officials are strongly in favour ofcollecting the whole amount of Zakat. They are followed bythe group of investors with a similar, but not as strong,pattern which favours 100 percent, then 50 percent then 75percent. Accounting firms employees, however, have acompletely different idea. Their ranking was reversed with50 percent at the top and 100 percent at the bottom rank.The apparent reason for this is that accountants, likelawyers, reflect their clients' interests. Among theirclients are businessmen whose Zakat amounts areconsiderable. They also prefer to have the freedom to paymost of it at their own discretion and to the recipients of224

their own choice. This attitude is close, but not similar,to the attitude of academics in the sense of trying toreduce the percentage of Zakat paid to the collectinginstitution. One question that can be raised is whyinvestors prefer to pay 100 percent of the Zakat to theauthorities?. The most obvious answer lies in thecomplicated process of calculating Zakat from theirinvestments. It would seen, therefore, that investors preferto avoid problems with the authorities and let specialisedinstitutions carry out the whole process of evaluation,collection and distribution of Zakat.There is no significant difference in attitude with respectto country related preferences. Although the chi-square forthe second item (50 percent) is just significant at the 10percent level, the insignificance of the other 3 items doesnot support the significance of the second item.Table 6.7(b)Percentage of Zakat that should be paidPercentage of Freq. Mean Rank Sub-group mean By country SD MIN MAX Chi-sq P. valueZakat thatshould be paidBA KU SA UAEto collectionauthority25% of the total 157 2.76 4 2.81 2.64 2.88 2.71. 948 1 5 1.73amount of Zakat. 63050% 154 3.18 3 2.86 3.10 3.43 3.18 1.10 1 5 6.26. 09975% 155 3.22 2 2.90 3.15 3.43 3.26 1.10 1 5 4.92. 178100% 154 3.48 1 3.29 3.21 3.76 3.55 1.41 1 5 3.60. 308BA= Bahrain KU= Kuwa it SA= Saudi Arabi a UAE= United Arab EmiratesThis is confirmed by examining the individual means of thesub-groups by country in which all the means are higher forthe fourth item (100 percent) and then gradually decrease.225

It was, however, roughly find two features in the table.Firstly, Bahrain respondents have the lowest scores,supporting the earlier discussion of their disagreement topay Zakat to the Department of Zakat. Also, becauseBahrainis prefer to pay to charitable organisations of theirown choice, they also implicitly reserve the right to chooseand vary the percentage they pay at their own discretion.This might explain Bahrain means, which are all near 3(indifference). Secondly, the highest scores are again withSaudi Arabia and the UAE respectively. Both have verysimilar patterns, agreeing more with 100 percent, less with75 percent and 50 percent, and disagreeing with 25 percent.Kuwait is in the middle between Bahrain, on the one hand,and Saudi Arabia and the UAE on the other.6.2.6 Satisfaction with methods used to calculate ZakatIn Saudi Arabia the Zakat Department uses two methods forcalculating Zakat. In other GCC countries, there is noofficial regulation governing Zakat evaluation, collectionand distribution. Islamic banks, charitable organisations,and Zakat payers must, however, themselves evaluate theamount of Zakat to be paid. It was, therefore, of interestto seek the respondents' opinions on the methods ofcalculating Zakat used by the Zakat Department. Therespondents were asked to express the level of their226

satisfaction with the way Zakat is collected and distributedby the Zakat Department. The statistical summaries and testsare reported in tables 6.8(a) and (b).Table 6.8(a)Degree of satisfaction with methods used to calculate ZakatFreq. Mean Rank sub-group mean By occupation SD MIN MAX Chi-sq P. valueAC GV INV AFThe current 158 3.77 1 3.61 3.79 3.96 3.73. 970 1 5 4.14 . 247method ofcalculatingZakat issatisfactoryThe current 157 3.40 2 3.40 3.57 3.37 3.29. 946 1 5 . 860 . 835method forcollecting Zakatis satisfactoryThe current 157 3.17 3 2.87 3.62 3.29 2.90 1.08 1 5 11.5method fordistributingZakat issatisfactoryAC= academics GV= governments IN V= investors AF= accounting firms. 009Taking the overall mean it seems that while there is noclear dissatisfaction with the current method of evaluationof Zakat, the mean of 3.77 does not show sufficient levelsof satisfaction. Knowing that the scale is between 1 forstrongly disagree to 5 for strongly agree with 3 forundecided, it can be seen that the mean is just near theagree level. This result also means that many respondentsare dissatisfied with the evaluation method. The means forthe method of collection and distribution are even lower,nearing the value of 3. Thus there is little satisfactionwith the way the Department of Zakat collects anddistributes Zakat. No difference seems to exist between thetypes of respondents (by occupation) regarding the first andsecond items (method of calculation, and method of227

collection), as the chi-square statistics and thesignificance levels clearly indicate. For the last item(method of distribution) there is, however, a significantvariation in opinion as the chi-square is highly significantat the 1 percent level. Looking at the individual means, itcan clearly be seen that academics, investors, andaccounting firms are dissatisfied with the method. On theother hand, government officials are relatively moresatisfied, producing a mean of 3.62. Government officials,by the very nature of their occupation, may be influenced bygovernment policies and share similar views to thegovernment. The government has its own method of selectingZakat recipients which might well conflict with the wishesof Zakat payers. Moreover, Zakat payers may think that thegovernment should set up its own budget to help the needyand the poor, while they should be given the opportunity andhonour to locate the poor and needy by themselves.Table 6.8(b)Degree of satisfaction with methods used to calculate ZakatFreq. Mean Rank Sub-group mean By country SD MIN MAX Chi-sq P. valueBA KU SA UAEThe current 158 3.77 1 3.88 3.69 3.86 3.66. 970 1 5 2.24 method of. 524calculatingZakat issatisfactoryThe current 157 3.40 2 3.26 3.46 3.45 3.39. 946 1 5 method for. 482 . 923collecting Zakatis satisfactoryThe current 157 3.17 3 3.03 3.15 3.19 3.26 1.08 1 5. 729 . 866method fordistributingZakat issatisfactoryBA= Bahrain KU = Kuwa it SA= Saudi Arabi a UAE= United Arab Emirates228

Table 6.8(b) reports the outcome of the analysis on acountry basis. By inspecting the individual means of thecountries, the finding indecated little difference in meanscores. This is confirmed by the very small chi-squarevalues and the level of significance. It Was notice thatBahrain has the highest score for the method of evaluation,but the lowest score in the method of collection anddistribution. The other three countries are very similar.6.3 Accounting for Zakat6.3.1 The placement of Zakat in annual reportsZakat is simply a transfer of certain amounts of money ormaterial goods from a person who is able to pay to a personwho is in need of help. In other words, Zakat is a transferpayment from the wealthy to the poor for the purpose ofredistribution of wealth and income, in order to achievesocial and economic justice in Muslim society.Many Muslims are highly interested in the activities oftheir companies and their degree of compliance with IslamicShariah principles. Many of them would like to see detailedinformation on the sources and uses of Zakat. In someIslamic countries, such as Egypt, the Faisal Islamic Bankincludes in its annual report detailed information on how itaccounts for Zakat, as well as information on conventional229

financial statements such as profit or loss accounts andbalance sheets. It includes statements of source and uses ofZakat. The statement is followed by a note explaining thefigures appearing in the statement. Such detailedinformation enables Muslim investors to make informedinvestment decisions. Accordingly, the respondents wereasked to give their views about the location of Zakatinformation in the annual report. The results by occupationand by country are summarised in tables 6.9(a) and (b)respectively.Table 6.9(a)Placement of Zakat in the annual reportZakat in Freq. Mean Rank Sub-group mean By occupation SD MIN MAX Chi-sq P. valuefinancial re p ortShould appear:AC GV INV AFin a separate 159 4.23 1 4.13 4.61 4.22 4.02. 910 1 5 9.67section. 022in shariah 159 4.21 2 4.00 4.34 4.34 4.17. 669 2 5 8.43supervisory. 038committeereportin director's 159 3.21 5 3.26 3.24 3.24 3.05. 980 1 5report. 733 . 866in chairman's 159 3.18 6 3.21 3.42 3.42 3.27 1.01 1 5 1.13report. 770in accounting 159 3.87 3 3.74 4.13 4.05 3.59 1.02 1 5 6.88. 076policiesin notes to the 159 3.67 4 3.80 3.71 3.78 3.42 1.12 1 5 2.96financialstatementAC= academics G V= governments IN V= investors AF= accounting firms. 398By examining table 6.9(a), and by looking at the ranking ofthe means, the highest means are in the first and seconditems, which are almost equal (4.23 and 4.21). Thus,respondents would prefer either to put Zakat in a separatesection or in a Shariah supervisory committee report.Opinion is clearly divided and this research must look atthe individual sub-group of occupation.230

As expected, the chi-square statistics in both items aresignificant at the 5 percent level, suggesting significantdifference in the mean responses of the four occupationgroups. Clearly, the means of academics and governmentofficials are higher in the first item (separate section),while for investors and accounting firms the opposite istrue. The statistical analysis of the means reveals a splitin the preference among the respondents. Academics andgovernment officials would prefer to see Zakat reported in aseparate section in the financial report. On the other hand,investors and accounting firms would rather see Zakat appearin Shariah supervisory committee reports. In any case, thedifferences are very small but still significant. Both thefirst and second items are technically separate reports. Sowhy is there a difference in emphasis? It seems that bothacademics and government employees would prefer to reducethe influence of Shariah scholars in the day to day businessof Zakat. Thus, while they still agree on the principle thatthe Shariah supervisory committee include Zakat in itsreport, there is a marginal preference for a separatesection in the financial report (i. e., without theinterference of Shariah scholars) .Investors and accountingfirms, on the other hand take the opposite position. Again,they agree to the first item, but they marginally prefer thesecond item. A possible explanation is that investors would231

like to be on the safe side as far as religion is concerned.So, by allowing Zakat to be scrutinised by Shariah scholars,investors may have peace of mind regarding the performanceof their duty towards Allah. Accountants, most of whom donot have experience in Zakat and religious matters, wouldalso seem to prefer to pass such responsibility to theShariah committee. The remaining four items were lessfavoured by the respondents and there is no statisticallysignificant difference among the sub-groups.Table 6.9(b) Placement of Zakat information in the annual reportZakat in thefinancial reportShould appear:Freq. Mean Rank Sub-group mean SD MIN MAX Chi-sq P. valueby countryBA KU SA UAEin a separate 159 4.23 1 4.21 4.41 4.24 4.08. 910 1 5 3.04section. 385in shariah 159 4.21 2 4.15 4.21 4.33 4.13. 669 2 5 1.91supervisory. 591committeereportin director's 159 3.21 5 3.24 3.13 3.33 3.00. 980 1 5 2.63report. 452in chairman's 159 3.18 6 3.30 3.28 3.41 3.15 1.01 1 5 1.79. 616reportin accounting 159 3.87 3 3.76 4.05 3.94 3.71 1.02 1 5 3.01policiesin notes to the 159 3.67 4 3.61 3.67 3.71 3.68 1.12 1 5financialstatementBA= Bahrain KU= Kuwa it SA= Saudi Arab ia UAE= United Arab Emirates. 391. 338 . 953Table 6.9(b) which shows the results of analysis by country,does not differ from the previous table in terms of theoverall means and rankings. This table does not show anysignificant differences between countries, as thesignificance levels are all greater than 0.05 (the 5 percentlevel). It is, however, interesting to compare the countries232

in the first two most popular items. By looking at theindividual means, the results suggest that Kuwait andBahrain give slightly more preference to a separate section,while Saudi Arabia and the UAE prefer the Shariahsupervisory committee report. Once more, the strength of thereligion in the latter two countries is reflected in therespondents' attitudes in their preference for religiousscholars to control Zakat accounts.The results indicate that the respondents would like to seedetailed information on Zakat either in a separate sectionin the annual report or in the Shariah supervisory committeereport. This information may assist them in makinginvestment decisions. Detailed information about Zakat isnot only beneficial to the public but also to companies,since by reporting Zakat details in their financial reports,they will be more likely to encourage and attract(conservative) Muslim investors.6.3.2 Auditing of ZakatIn the previous subsections the respondents' opinions on whoshould evaluate, collect and distribute Zakat werediscussed. The respondents were also asked to state theirpreferences on the percentage of Zakat that should be paidto collecting institutions, and where Zakat informationshould be placed in annual reports.233

It is uncontested that the degree of accountability andtransparency of the Zakat section in the annual reportshould be assessed through auditing. Hence, respondents wereasked who should carry out the task of auditing Zakataccounts. The statistical results are presented in tables6.10(a) and (b).Table 6.10(a)Auditing of ZakatWho shouldFreq. Mean Rank sub-group mean by occupation SD MIN MAX Chi-sq P. valueaudit Zakat AC GV INV AFaccount?Department of 154 4.45 1 4.53 4.41 4.46 4.39. 848 1 5 Zakat. 380 . 944Shariah 159 4.14 2 3.87 4.26 4.32 4.10. 846 1 5 10.4supervisory. 015committeeAccountant 157 3.29 4 3.31 3.18 3.59 3.05 1.05 1 5 5.51from Islamic. 138bankAuditors 158 3.96 3 3.92 3.89 4.27 3.73. 933 1 5 7.28 AC= academics GV= governments IN V=investors AF= accounting firms. 064The overall means from both tables indicate that therespondents either agree or strongly agree with the proposalthat the Zakat section in the annual report should beaudited by either Zakat Department (ranked 1) or the Shariahsupervisory committee (ranked 2). The high means suggestthat the vast majority of respondents strongly agree withthe suggestion for the first two items, but that morerespondents agree strongly in the case of the Department ofZakat. The agreement among the occupation groups is verystrong as indicated by the very high significance statistic.A close look at the individual means in the first item showsthat the means for the four groups (AC, GV, INV and AF) are234

around 4.5, suggesting an almost unanimous agreement thatauditing should be carried out by the Department of Zakat.The highest mean in this first item is from academics whoshow less support for the Shariah supervisory committee. Thechi-square, however, is significant at the 5 percent levelfor the second item. This suggests that there isdisagreement amongst the respondents. Looking at the tablereveals that the source of this disagreement is theacademics, whose mean was 3.87 while the means of the otherthree groups were around 4.20. There was evidence earlier ofsome apprehension from academics towards religious scholars'involvement in the day-to-day running of Zakat affairs. Inthe same way, academics do not seem to favour theinvolvement of scholars in the auditing of Zakat.Nevertheless, the other three groups have also given theShariah committee second place in their respective meanresponses. There is no significant difference in theremaining two items (accountants from Islamic bank, andauditors) which received little support from therespondents. The reason for this lack of support may be thatconventional auditors may lack sufficient knowledge aboutIslamic Shariah principles, especially those related toZakat. On the other hand, Shariah advisory and supervisorycommittees, as well as accountants from Islamic banks areusually employed by the owners of businesses, and235

espondentsseem to share some doubt as to theirindependence.Table 6.10(b)Auditing of ZakatFreq. Mean Rank Sub-group mean by country SD MIN MAX Chi-sqWho shouldP. valueaudit Zakat BA KU SA UAEaccount?Department of 154 4.45 1 4.42 4.38 4.69 4.23. 848 1 5 5.90 Zakat. 117Shariah 159 4.14 2 4.19 4.05 4.20 4.18. 846 1 5supervisory. 088 . 993committeeAccountant 157 3.29 4 3.34 3.03 3.39 3.37 1.05 1 5 3.92from Islamic. 271bankAuditors 158 3.96 3 3.97 3.97 3.94 3.94. 933 1 5 BA= Bahrain KU = Kuwa it SA= Saudi Arabi a UAE= United Arab Emirates. 042 . 998Analysed by country, the overall ranking remains unchanged,and the tests show no statistically significant differencesin the means of the four countries. It is worth noting thatthe highest mean score was given by Saudi Arabianrespondents to the Department of Zakat, probably because ofthe existence of this institution in Saudi Arabia.6.3.3 Zakat regulationAccounting regulation has existed for a long time in thedeveloping countries. Even though Zakat is not currentlyregulated, it is assumed that, with the ever-spreadingprinciple of Zakat in Islamic countries, there will be aneed for increased regulation. Feedback was, therefore,required from respondents concerning the question of whoshould regulate Zakat. To that end, respondents were invited236

to express their opinions on the question. The meanresponses as well as other statistics are shown in tables6.11(a) and (b).Table 6.11(a)Zakat regulationFreq. Mean Rank sub-group mean by occupation SD MIN MAX Chi-sq P. valueWho shouldregulate Zakat? AC GV INV AFGovernment 159 4.03 4 3.72 4.34 4.00 4.05 1.02 2 5 5.88. 117Moslem scholars 159 4.07 3 3.82 3.90 4.42 4.12. 922 2 5 9.46 . 024Academics 159 3.25 6 2.97 3.11 3.59 3.32. 920 1 5 9.46 . 024Government 159 4.17 2 4.05 4.08 4.32 4.22, . 820 2 5 3.26 . 353with advise fromMoslem scholarsGovernment, 158 3.48 5 3.63 3.24 3.59 3.46 1.02 1 5 4.60. 204with advise fromacademicsGovernment, 159 4.58 1 4.54 4.63 4.63 4.54. 740 2 5 1.12 . 772with advise fromMoslem scholarsand academicsAC= academics GV= governments INV= investors AF= accountin g firmsIt is quite evident from tables 6.11(a) and (b) that therespondents gave a lot of support to a partnership betweengovernment, Muslim scholars and academics towards regulatingthe accounting of Zakat. There is unanimity among occupationgroups and by countries, where the chi-square statistics areinsignificant. Looking at the remaining ranks, it is clearlyseen that Muslim scholars have the edge on academics byranking second and third while academics ranked fifth andsixth. There is disagreement only in the second (Muslimscholars) and third (academics) items as can be seen fromthe chi-square significance. In the second item, the lowestscore was given by academics, which shows the low supportacademics give to Muslim scholars. The academics have,however, shown their objectivity by giving an even lower237

score to themselves on the suggestion that they should havesole responsibility for regulating Zakat.Table 6.11(b)Zakat regulationFreq. Mean Rank Sub-group mean by country SD MIN MAX Chi-sq P. valueWho shouldregulate Zakat?BA KU SA UAEGovernment 159 4.03 4 3.79 3.87 4.20 4.15 1.02 2 5 5.55. 136Moslem scholars 159 4.07 3 4.33 4.03 4.16 3.76. 922 2 5 7.08 . 070Academics 159 3.25 6 3.39 3.05 3.27 3.31Government, with 159 4.17 2 4.15 4.28 4.27 3.94advise fromMoslem scholarsGovernment, with 158 3.48 5 3.41 3.41 3.49 3.60 1.02 1 5advise fromacademicsGovernment, with 159 4.58 1 4.58 4.54 4.61 4.60advise fromMoslem scholarsand academicsBA= Bahrain KU= Kuwait SA= Saud i Arabia UAE= United Arab Emirates. 920 1 5 2.77 . 428. 820 2 5 5.34 . 148. 502 . 918. 740 2 5 . 170 . 982The national groups showed no significant differences inopinion as can be seen from the statistics in table 6.11(b).The above results highlight the cultural features of Arabsocieties in general and of the Gulf societies inparticular, in that regulation requires enforcement. Theacademics and Muslim scholars have the requiredqualification to set standards for accounting and disclosurefor Zakat. They do, however, lack the required means toimplement such standards. Thus, the respondents seem to beaware of this problem and choose the partnership of thethree bodies to ensure better regulation.6.3.4 Variations in Zakat evaluationGenerally accepted accounting principles permit flexibilityin profit measurement and this affects the calculation of238

Zakat. Some companies may be tempted to avoid paying Zakator reduce the Zakat amount by means of increasingexpenditure and manipulating profit figures. In order toinvestigate the possible causes of variation in accountingfor Zakat, respondents from all groups involved in thisstudy were provided with a list of possible causes and askedto give their opinion from a five point scale (1 = stronglydisagree to 5= strongly agree).Table 6.12(a)Variations in Zakat evaluationFreq. Mean Rank Sub-group mean by occupation SD MIN MAX Chi-sq P. valueAC GV INV AFDepreciation 159 3.87 5 3.81 4.16 3.54 3.98 1.03 2 5 8.04. 045Bad debts 159 4.18 2 4.30 4.18 4.27 3.98. 701 2 5 6.40 . 096Allowances and 159 3.68 8 3.90 3.61 3.85 3.37 1.01 2 5 7.35. 062reserveExpenditures 159 4.15 3 4.33 4.11 4.29 3.88. 805 2 5 7.69 . 053End of service 159 4.06 4 4.18 4.08 4.20 3.78. 878 2 5 6.35 . 098awardsFees of firm's 159 3.87 6 4.00 3.79 4.00 3.73. 940 2 5 2.69 . 442board ofDirectorsSalaries, wages 159 3.73 7 3.82 3.68 3.95 3.46. 952 2 5 5.96 . 114and similaritemsExpenditure 159 4.27 1 4.28 4.28 4.46 4.05. 777 2 5 7.32 . 060from previousyearsAC= academics G V= governments IN V= investors AF= accounting firmsTables 6.12(a) and (b) summarise the statistical results byoccupation and country. The discussion concentrates on thetop 4 variation items since they were the only ones withmean responses greater than 4 (i. e., where the majorityresponded with agree and strongly agree). According to themeans, the top four variations are expenses from previousyears, bad debts, current expenses, and end of serviceawards, respectively. In these items, the chi-square239

statistics were not significant at the 5 percent level forthe occupation groups. It is, therefore, concluded thatthere is no significant difference of opinion among thevarious occupation groups.It was noted that the only significant difference among theoccupation groups was on the first item, and in this respectthere is a significant difference between governmentofficials and investors in respect to depreciation. Thegovernment's Zakat Department measures depreciationaccording to the specified percentages as a maximum limitand on the basis of a historical value. This evaluationreduces the depreciation amount which inflates the netprofit. Treatment of depreciation does not, however, complywith the criterion of protecting capital, since it may leadto the firm's future inability to replace its fixed assets.Table 6.12(b)Variations in Zakat evaluationFreq. Mean Rank Sub-group mean by country SD MIN MAX Chi-sq P. valueBA KU SA UAEDepreciation 159 3.87 4.68 3.49 3.65 3.92 1.03 2 5 26.25. 000Bad debts 159 4.18 4.03 4.23 4.18 4.26. 701 2 5 2.72 . 436Allowances and 159 3.68 3.48 3.48 3.89 3.76 1.01 2 5 5.36. 147reserveExpenditure 159 4.15 4.00 4.28 4.04 4.28. 805 2 5 3.28 . 350End of service 159 4.06 3.88 4.41 3.93 4.03. 878 2 5 8.26 . 041awardsFees of firm's 159 3.88 3.79 4.12 3.73 3.89. 940 2 5 4.41 board of. 221DirectorsSalaries, wages 159 3.73 3.61 3.79 3.71 3.79. 953 2 5 1.51 . 680and similaritemsExpenditure 159 4.27 4.15 4.25 4.33 4.32from previousyearsBA= Bahrain KU= Kuwa it SA= Saudi Arab ia UAE= United Arab Emirates. 777 2 5 772 856.Table 6.12(b) shows significant difference between countrieswith respect to depreciation and end of service awards.ci240'

Bahrain gives depreciation the highest score, while SaudiArabia gives it the lowest. With regards to end of serviceawards, Kuwait gives the highest score. For the remainingitems, no significant difference was found. The reasonbehind the differences in the first item may be that SaudiArabia is the only country that has a Department of Zakat.The experience of Saudi respondents should, therefore, beexpected to be different from other countries, especiallywhen dealing with technical accounting practices such asthose represented in the first item. Also, the significantdifferences between countries with respect to end of serviceawards may be due to the differences in the regulation andrules governing the end of service awards in each country.6.4 Proposed recommendations6.4.1 Reasons behind the low level of Zakat collectionCurrently, there is no regulation to govern Zakat accountingin the GCC countries, except in Saudi Arabia. Imposingregulation in other GCC countries might prove to bedifficult for two main reasons. Firstly, Zakat is areligious duty just as are prayer and fasting. Government'scan do little to regulate and enforce Zakat, since thelatter is an important part of the relation between anindividual and Allah. Regulating such relations can beconsidered as an intrusion upon individual freedom.241

Secondly, Gulf countries have not yet been under sufficientfinancial pressure to press for Zakat regulation, thanks tothe high surplus income from oil.The implementation of the Zakat in the early days of thepresent Saudi dynasty was not regulated by government, aspeople themselves spent the revenue of Zakat on the poor,according to the instructions of Islam. People know thatZakat is one of the five fundamental Islamic principles, butmost were unaware of the principles on which it was levied,due to poor education. They often declared their wealth toreligious leaders who decided how much should be given tothe needy. People sometimes submitted this amount to theQadi (judge) to distribute on their behalf. Today, it seemsthat such a tradition continues to be strongly followed,especially in GCC countries other than Saudi Arabia. Byasking for possible reasons for the low levels of Zakatcollection by collection institutions, it is hoped to obtaina better insight into the problems which could face theestablishment of Zakat institutions and regulations in theGCC. The respondents were provided with a list of possiblereasons and asked to express the extent of their agreementwith each reason.242

Table 6.13(a)Reasons behind low level of Zakat collectionFreq Mean Rank sub-group mean by occu pation SD MIN MAX Chi-sq P. valueAC GV INV AFLack of Zakat 159 4.11 1 3.85 4.32 4.22 4.05. 861 2 5 7.59 regulation. 055Lack of Religious 159 3.55 5 3.54 3.55 3.32 3.78 1.14 1 5 3.14practice. 371Companies try to 159 4.02 2 4.05 4.16 3.96 3.93. 896 1 5 avoid Zakat. 815 . 846paymentsThe need for 159 3.82 3 3.62 3.92 3.88 3.85. 856 2 5 2.71 . 439Zakat regulationhas not yet beenseen as a seriouspublic concern insome GCCcountriesZakat regulation 159 3.44 6 2.44 3.76 3.07 3.51 1.14 1 5 6.27requires thespecialities andhuman resourceswhich thegovernments donot yet possessThe problem of 159 3.62 4 3.74 3.82 IT 3.66 1.10 1 5 5.84enforcementAC= academics GV= governments IN V= investors AF= accounting firms. 099. 120In tables 6.13(a) and (b) the overall result indicatesgeneral agreement in opinion among occupation groups andnationalities (all chi-square values are insignificant atthe 5 percent level). Based on the mean of each item, therespondents place the lack of Zakat regulation as the mostimportant reason for the low level of Zakat collection. Thesecond most important reason is Zakat evasion by companies,while the third most important is that Zakat regulation isnot yet seen as a serious public concern. The fourth reasonis the problem of enforcement.243

Table 6.13(b)Reasons behind low level of Zakat collectionFreq. Mean Rank Sub-group means By country SD MIN MAX Chi-sq P. valueBA KU SA UAELack of Zakat 159 4.11 1 4.09 4.08 4.04 4.23. 861 2 5 1.15 . 766regulationLack of Religious 159 3.55 5 3.55 3.74 3.67 3.18 1.14 1 5 6.08. 108practiceCompanies try to 159 4.02 2 3.85 4.13 3.96 4.13avoid Zakatpayments. 896 1 5 3.09 . 378The need for 159 3.82 3 3.97 3.95 3.67 3.73 . 856 2 5 3.70 . 296Zakat regulationhas not yet beenseen as a seriouspublic concern insome GCCcountriesZakat regulation 159 3.44 6 3.21 3.74 3.39 3.39 1.14 1 5 3.39requires the. 336specialities andhuman resourceswhich thegovernments donot yet possessThe problem of 159 3.62 4 3.55 3.74 3.43 3.79 1.10 1 5 3.42. 331enforcementBA= Bahrain KU= Kuwait SA= Saudi Arabi a UAE= United Arab EmiratesTable 6.13(b) shows no significant difference between thefour GCC countries, suggesting an agreement of opiniontowards the reasons behind low levels of Zakat collection.6.4.2 Appointment of Shariah supervisory committeeAll companies' activities must comply with Shariahrequirements. Companies and Islamic banks should haveShariah supervisory committees (SSC), although they are notmandatory. The purpose of the SSC is to provide an assurancethat the company and bank will operate within Shariahprinciples. The aim of the SSC is to fulfil the followingobjectives: (1) complete elimination of interest; (2)avoidance of gambling and speculation; and, (3) avoidance ofany contracts or trade in prohibited products (Abumouamer,244

1989). Apart from these functions the SSC should provideguidance on documentation, transactions and business, whichconform with Shariah principles. It should prepare areligious auditing report- which is regarded as part of theannual report (Karim, 1995).Karim (1995) further pointed out the SSC are appointed byshareholders in the general meeting which makes them part ofthe company or Islamic bank's management. The appointedmembers are under a responsibility to the management, notthe shareholders who appointed them. Thus, if the SSC putthe interest of the shareholders first, this may give riseto some conflicts between them and the management.The independent or legal auditor is one of three partiesinvolved in determining and estimating the Zakat revenues.He/she is supposed to be neutral in determining the Zakatassessment since he/she has no conflict of interest and can,therefore, easily be impartial. There is, however, atendency to keep the SSC since it represents the company'sinterests in the determination of the Zakat.An important issue is whether the government or the companyshould appoint and pay for the Shariah supervisorycommittees. In practice, Zakat is controlled by governmentsupervision. The Holy Qur'an states that:245

Alms (Zakat) are for the poor, the needy, and thoseemployed to administer the (funds). For those whosehearts have been (recently) reconciled (to Truth), forthose in bondage and in debt, in the cause of God and forthe wayfarer: (this is it) ordained by Allah as Allah isfull of knowledge and wisdom. (Qur'an, chapter 19: 30 and31).People who are given the job of collecting and distributingZakat should be paid salaries. It is not clear, however,whether the Qur'an means by those employed to administer the(funds) government or private employees. On this questionthe respondents were provided with a list of choices andasked to indicate the level of their agreement with each.Table 6.14(a)Appoint and pay for Shariah supervisory committeeWho should Freq. Mean Rank sub-group means by occupation SD MIN MAX Chi-sq P. valueappoint Shariaadvisor y andsupervisoryAC GV INV AFcommittee?Companies 159 2.74 2 2.92 2.65 2.69 2.68 1.09 1 5. 777 . 855Government 159 4.26 1 3.77 4.50 4.54 4.54. 895 1 5 21.5 . 000Who should paythe Shariaadvisory andsupervisorycommittee?Companies 159 3.30 2 3.13 3.09 3.27 3.27 1.13 1 5 6.37. 095Government 159 3.91 1 3.28 4.37 3.83 4.15 1.13 1 5 20.0. 000AC= academics G V= governments IN V= investors AF= accounting firmsIt is evident from table 6.14(a) that the respondents wishto see government playing a major role in appointing andoffering remuneration to the Shariah supervisory committee.This is reflected by the mean among the four occupationgroups who took part in this study, as well as the fournationalities. It is clear that the majority of respondentsdo not agree with the proposition that companies shouldappoint and pay the SSC. The significant chi-square in table246

6.14(a) for the appointment of the SSC suggests disagreementfrom the respondents. From examining the table it is,however, seen that the significance is due to the relativelylow score given by the academics, with a mean of 3.77, whilethe other three occupation groups have a mean of around4.50. Interestingly, the academics were not in favour ofcompanies doing this job either and, therefore, the onlyinterpretation is that, while academics agree to theproposition that government should be involved, the level oftheir agreement is not as high as that of the other threegroups. Perhaps academics would prefer a joint involvementof both companies and government in the appointment of theSSC.A similar result is obtained on the question of the SSC'ssalaries. Again, the significant chi-square seems to becaused by the very low score from the academics, with a meanclose to 3. By a comparison of the two mean scores byacademics (companies and government) it is found that theyare almost equal. Again this suggests that academics mightprefer a shared responsibility in paying the SSC.247

Table 6.14(b) Appointment and pay for Shariah supervisory committeeWho should Freq. Mean Rank Sub-group means by country SD MIN MAX Chi-sq P. valueappoint shariaadvisoryandBA KU SA UAEsupervisoryCommittee?Companies 159 2.74 2 2.90 2.76 2.88 2.42 1.09 1 5 6.17. 104. 895 1 5 1.54 . 673Government 159 4.26 1 4.18 4.15 4.41 4.23Who should paySharia advisoryand supervisorycommittee?Companies 159 3.30 2 3.42 3.19 3.40 3.18 1.13 1 5 1.53Government 159 3.82 1 3.79 3.92 3.84 3.73 1.15 1 5 1.43BA= Bahrain KU= Kuwa it SA= Saudi Arabi a UAE= United Arab Emirates. 675. 698Table 6.14(b) reveals no difference between nationalities intheir opinions about appointing and paying the SSC. Bylooking at the mean scores, however, it is shown thatrespondents are strongly in favour of appointments made bythe government (while disagreeing with appointments made bycompanies). On the other hand, the opinions about paymentare not so clear cut. The mean scores for companies andgovernment are 3.30 and 3.82 respectively. Thus, it seemsthat the respondents would like to see companies paying atleast a part of the SSC salaries.6.4.3 Potential benefits from Zakat implementationZakat is the backbone of an Islamic economic system. It ispaid in fulfilment of a religious duty. Zakat is used tohelp solve some aspects of poverty and misery. Zakat is aresponsibility towards society and the needy, and it is paidto comply with Allah's command. Moreover, Zakat helps inmaintaining social solidarity amongst Muslims. It lessens248

the disparity between the wealthy and the poor and removesenvy and hatred between the strong and weak.Respondents who took part in this study were given a choiceof several factors representing potential benefits of Zakat.The outcome of the respondent's answers is reported intables 6.15(a) and (b). Since the benefits of Zakat arepurely a matter of opinion, there will be some variation inviews among the various occupation groups. It should firstbe noted, however, that all 7 items were viewed as importantby the respondents. The only difference is on the level ofimportance shown by the various groups. Overall, the mostimportant item was religious duty, followed by socialjustice. The third most important factor is promotingcharitable organisations, followed by economic efficiency.Table 6.15(a)The potential benefits from Zakat implementationFreq. Mean Rank sub-group mean SD MIN MAX Chi-sq P. valueAC GV INV AFSatisfy religious 159 4.64 1 4.31 4.68 4.88 4.66. 533 3 5 24.9 . 000dutiesImprove social 159 4.57 2 4.36 4.66 4.71 4.54justiceImprove 159 4.25 4 4.13 4.55 4.39 3.95economicefficiencyImprove the 159 4.07 5 4.00 4.08 4.27 3.93reputation ofcompaniesIncrease local 159 3.91 6 3.97 4.18 4.02 3.46investmentPromote 159 4.30 3 4.26 4.45 4.39 4.10charitableorganisationsImprove the 159 3.85 7 3.87 4.03 4.15 3.37quality ofcorporatefinancial reportsAC= academics G V= governments IN V= investors AF= accounting firms. 522 3 5 11.5 . 009. 779 2 5 12.8. 005. 942 1 5 6.04 . 110. 870 2 5 14.4 . 002. 717 2 5 4.65 . 199. 899 2 5 16.8 . 001From table 6.15(a) it is clear that the chi-squarestatistics were highly significant at the 1 percent level in249

five out of seven items, suggesting that different groupsgive different importance to the question's items. Forexample, academics put social justice at the top while theother three groups classify it as second. Religious duty isclassified second by academics while it is classified asfirst by the other three groups. Economic efficiency isclassified fourth by accounting firms and academics whilethe other two groups classify it third. Finally, promotingcharitable organisations is classified fourth by governmentofficials while the other three groups classify it third.Accounting firm employees do not seem to agree with theproposition that Zakat increases local investment, or thatit would improve the quality of corporate financial reports.The other three groups, however, show some agreement withthe proposition. Indeed, the announcement and implementationof Zakat in the annual report may give investors additionalinformation which could assist them in making investmentdecisions.Improving the reputation of companies, increasing localinvestment, and improving the quality of corporate financialreports were seen as the least beneficial items by investorsand government officials. There are, however, alsodifferences, even within these two groups. For example,investors perceive increasing local investment as the leastimportant with a score of 4.02, while for government250

officials improving the quality of corporate financialreports has the lowest score of 4.03. The two groups alsodiffer in the second lowest scores with investors having amean response of 4.15 for improving the quality of corporatefinancial reports, while government officials scored a meanof 4.08 for improving the reputation of companies.Table 6.15(b)The potential benefits from Zakat implementationFreq. Mean Rank Sub country mean SD MIN MAX Chi-sq P. valueBA KU SA UAESatisfy religious 159 4.64 1 4.73 4.69 4.67 4.44. 533 3 5 7.77 . 051dutiesImprove social 159 4.57 2 4.70 4.62 4.51 4.47. 522 3 5 4.32 . 229justiceImprove 159 4.25 4 4.30 4.36 4.18 4.18economicefficiencyImprove the 159 3.95 5 4.12 4.00 3.83 3.89reputation ofcompaniesIncrease local 159 3.91 6 3.85 4.05 3.86 3.87investmentPromote 159 4.30 3 4.52 4.26 4.27 4.18charitableorganisationsImprove the 159 3.85 7 3.79 4.03 3.80 3.79quality ofcorporatefinancial reportsBA= Bahrain KU= Kuwa it SA= Saudi Arabi a UAE= United Arab Emirates. 779 2 5 1.23. 747. 973 1 5 1.79 . 617. 870 2 5 1.57 . 666. 717 2 5 3.87 . 275. 899 2 5 1.78 . 618The results of the statistical tests presented in table6.15(b) indicate no significant difference in attitude amongthe respondents from various countries. The variety offinancial (and Zakat) regulation, religious conservatism,and government policy towards Zakat does not seem to haveany effect on the respondents' opinions about the potentialbenefits of Zakat implementation. Although there are minordifferences in the individual country's rankings, these canbe attributed to chance as suggested by the significancelevel displayed in the table. Thus, overall, the ranking251

discussed earlier remains unchanged. It may, however, benoticed that, in the two least important items (according tothe overall ranking), Kuwait has the highest score. Whileall other three countries have mean scores of less than 4,Kuwait respondents have an average score of 4.05 and 4.03.6.4.4 Possibility for and importance of ZakatharmonisationFor many Muslims, the activities of companies and the degreeof their compliance with Islamic Shariah principles is ofparamount importance. Muslims are less likely to invest incompanies that deal with interest or companies that avoidpaying Zakat. To them, in the process of making investmentdecisions, having access to detailed information on thesources and uses of Zakat within a company is crucial.Muslims may, however, invest in various companies and,possibly, even in various countries, since GCC laws do allowcitizens of GCC countries to invest in any member state.Thus, it is extremely important that they do understandfinancial reports dealing with Zakat. One way offacilitating the understanding of these reports is to makethem as simple as possible. Another important factor isharmonisation. Harmonisation of financial reports within acountry and within the GCC states would help investorsunderstand a company's position vis ä vis Zakat and,therefore, help them make religiously and/or financially252

sound investment decisions. This question is to determinewhether respondents feel harmonisation of Zakat measurementand disclosure is possible in GCC countries. Judging by thehigh -overall means in the table, respondents' opinionstowards Zakat measurement and harmonisation are highlypositive. GCC populations could, therefore, welcome theharmonisation of measurement and disclosure of Zakat. Buttable 6.16(a) does show to be highly significant at the 1percent level on all four items, suggesting different levelsof agreement among occupation groups.Table 6.16(a)Zakat measurement and disclosureFreq. Mean Rank sub-group means by occupation SD MIN MAX Chi-sq P. valueAC GV INV AFHarmonisation of 159 4.27 1 4.21 4.29 4.61 3.98. 785 1 5 14.7 . 002Zakatmeasurement ispossible in theGCC countriesHarmonisation of 159 4.24 2 4.23 4.29 4.34 3.88. 754 2 5 10.2 . 012Zakat disclosure ispossible in theGCC countriesHarmonisation of 159 4.22 3 4.26 4.26 4.49 3.88. 801 1 5 12.6 . 006Zakatmeasurement isimportant in theGCC countriesHarmonisation of 159 4.19 4 4.18 4.18 4.49 3.90. 797 2 5 11.8 . 008Zakat disclosure isimportant in theGCC countriesAC= academics GV= governments INV= investors AF= accountin g firmsBy examining the sub-group means it becomes clear that themost pessimistic group with respect to all four items isaccounting firms, with means varying between 3.88 and 3.98.Although these means suggest agreement by accounting firms,they do not reach the same level of agreement as the otherthree occupation groups whose means vary between 4.18 and253

4.61. The opinion of accounting firms is important to thesequestions. It appears that academics, government officialsand investors are driven by enthusiasm rather than realism,due to the benefits that such harmonisation could bring. Onthe other hand, accounting firms do show some form ofagreement, but their enthusiasm seems to be limited by theirpractical experience as accountants, as they are aware ofthe difficulties of bringing together several sovereigncountries (with varying regulations) for the purpose offollowing a unified regulation and law. Thus, whileharmonisation is still possible and important, it should bemade aware that possible obstacles could hinder the worktowards harmonisation. It should be clear that lengthy andcareful preparation should take place well before embarkingon a harmonisationprocess.Table 6.16(b)Zakat measurement and disclosureFreq. Mean Rank sub-group means by country SD MIN MAX Chi-sq P. valueAB KU SA UAEHarmonisation 159 4.27 1 4.42 4.36 4.40 3.87. 785 1 5 10.56 . 014of Zakatmeasurement possible in theGCC countriesHarmonisation 159 4.24 2 4.30 4.31 4.27 4.08of Zakatdisclosure ispossible in theGCC countriesHarmonisation 159 4.22 3 4.33 4.21 4.34 3.97of Zakatmeasurement important in theGCC countriesHarmonisation 159 4.19 4 4.27 4.15 4.34 4.00of Zakatdisclosure isimportant in theGCC countriesBA= Bahrain KU= Kuwa it SA= Saudi Arab ia UAE= United Arab Emirates. 724 2 5 2.93 . 402. 801 1 5 3.26. 353. 797 2 5 3.70 . 296254

Table 6.16(b) shows no difference in opinion by countrygroup towards harmonisation, with the exception of the firstitem (harmonisation of Zakat measurement) where the chi-square is significant at 5 percent. The source of differenceis clearly due to the low scores by the UAE respondents. Bygiving attention to the second item (harmonisation of Zakatdisclosure) it has been found that the UAE respondents,again, have the lowest score, although not significantlydifferent at the 5 percent level. The same remark appliesto the third and fourth items. It is interesting to ask whyUAE respondents have such low scores. The answer could liein the political setting of the four countries. The statesof Bahrain, Kuwait and Saudi Arabia, are all unified stateswith a single central authority. The UAE, however, is aloose federation of eight emirates, and the ruler of eachemirate has absolute power over his territory. Therelationship between this political remark and ourrespondents' low score lies in the fact that UAE respondentsare well aware of the difficulties encountered in theircountry when they have tried to harmonise education, thepolice, defence and other vital sectors of the state. Thiscould be the reason why they are not so sure about thepossibility (and importance) of harmonisation.255

6.5 SummaryThis chapter has empirically investigated a number ofimportant issues relating to the Department of Zakat inSaudi Arabia and the proposal to extend the work of thisdepartment to the other GCC countries. The chapter has alsoinvestigated various recommendations towards this end,including the requirement for harmonisation of Zakatregulation and control throughout the GCC countries. Theresults and discussion were based on a statistical analysisof a survey sample representing the private and publicsector in four GCC countries.Statistical tests revealed that there is some objection topaying Zakat to official institutions. This objection wasmainly due to the misleading effect of the religious beliefthat Zakat is a relation between Muslims and Allah. From thepoint of view of introducing a method for regulating andaccounting for Zakat collection and distribution thisdiverts attention from practical considerations.A lack of confidence in companies, to deal with Zakat, wasalso found. Islamic and other commercial banks were not seenas suitable for collecting and distributing Zakat, despitethe technical capabilities of commercial banks in the Gulf.Some difference in views among the various occupation groupswas highlighted. The study also found significant256

differences among the GCC countries regarding manyaccounting and regulatory aspects of Zakat. Thesedifferences suggest that harmonisation and unification ofZakat systems in the GCC might be extremely difficult toachieve.Finally, a number of proposals and suggestions were maderelating to the accounting of Zakat, Zakat regulation,collection and distribution, and Zakat harmonisation weremade.The following table summarises the most significant findingsin this chapter. These and other findings have been fullydiscussed in the previous sections.Main finding Main Factor/Reason SuggestionsMany respondents objected to Zakat is a relation Give more roles to charitablepaying zakat to the government between a Muslim and organisations, reduce percentageGodcollected.Banks are not the preferred Profit oriented Zakat department and charitableinstitution for collection and organisation, organisations should open zakatdistribution zakat commercial banks are accounts in Islamic banks tobased on Riba.indirectly incorporate Islamicbanks.The GCC countries are split in Kuwait/Bahrain have Approach to zakattwo: Saudi Arabia/UAE prefer large Shiite population. harmonisation should bezakat department,bilateral in the beginning.Kuwait/Bahrain prefer charitableorganisations.Disagreement between Occupation seems to be Implement incrementalrespondents by occupation the main reason for the percentage.regarding proportion of zakat todisagreementbe paid to government257

ChaptersevenSummaries,conclusionandrecoininendations

ChaptersevenSummaries, conclusion and recommendations7.0 IntroductionThis chapter provides a summary of the main findings of thestudy and briefly discusses the implications of thesefindings for the formulation of a Zakat system in thecontext of the Gulf States.The chapter proceeds as follows: section 7.1 provides asummary of the thesis, by chapter; section 7.2 presents the" main conclusions obtained from the study; section 7.3 givesrecommendations to reconcile accountancy measurement andthe Zakat base; and, other recommendations are given insection 7.4.7.1 Summary of the thesis7.1.1 Chapter oneThis chapter introduced the topic of the thesis and set outthe study objectives, methodology and limitations.258

7.1.2 Chapter twoThis chapter provided backgrounds to the six GCC countries:Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UnitedArab Emirates. It focused on these GCC states in terms oflocations, borders, populations, socio-politicalbackgrounds, economic backgrounds, social and culturalbackgrounds, the regulation of Zakat and the importance ofZakat to the economies of the GCC countries.7.1.3 Chapter threeIn this chapter the main principles and features of Islamiceconomics were outlined. Also, the main goals of wellbeing,social and economic justice, equitable distribution ofincome, freedom of ownership and economic activity werediscussed.The Islamic belief is that although God is the ultimateowner, human beings are His vicegerents on earth. Privateproperty is, therefore, recognised and protected by Islam,in the event that public ownership is not possible or isinjurious to the public interest. For this reason, rivers,roads, the treasury and mines are all public properties intheGCC countries.259

Freedom of activity is protected in Islam, although anyproduction, sale or consumption must be within theframework of the Shariah. This latter, the embodiment ofIslamic law, is the source of Islamic moral values, whichplay a major role in Islamic economics. In addition toregulation, moral values guide the relationship betweenproducers and consumers and between employees andemployers. Social justice provides for equal opportunity ofwork and a minimum subsistence level. Social differencesare minimised and concentration of wealth is discouragedand reduced through the imposition of Zakat and inheritancelaw.Although all Muslims believe that Riba is prohibited, notall of them have refrained from making deposits in usuriousbanks, partly because they had no alternative, or becausethe interest was too attractive.Riba, which is interpreted as interest, Both the Qur'an andthe Sunnah are clear as to its prohibition. But becauseusury was practised by pre-Islamic Arabians and during theearly stages of Islam, the prohibition was doneprogressively. In general, in order for the lending deal tobe lawful, the lender must share both the risk and success260

(profit) with the borrower. Any deal in which the lender isguaranteed his capital and excess is usurious, which isexactly the case with current interest-based bankingactivity.7.1.4 Chapter fourIn this chapter the financial system of Zakat was discussedtogether with its functions in relation to the Muslimcommunity. In general, Zakat provides a means ofredistributing wealth from the rich to the poor. Somemethods of calculating Zakat were presented, though thereare controversial issues relating to this, particularly ontrade Zakat or business Zakat. The chapter highlighted theneed for GCC countries to resolve this longstanding problem(which should not be overlooked as it is one of the fivepillars of Islam). For example, Zakat has not beenimplemented in an institutionalised form in the GCCcountries, except in Saudi Arabia. There are, however, someorganisations in the other GCC countries which collectZakat but there are differences between them in the methodsof administration of Zakat. Some of them calculate Zakatdifferently from others. Some have based their calculations261

on net profit and others on the value of net current assetsand short-term investment, as shown in the balance sheet.7.1.5 Chapter fiveThis chapter dealt with matters relating to the researchmethodology and highlighted the objectives of the surveyand various issues with respect to the researchquestionnaire, sample and structure of statistical test.7.1.6 Chapter sixIn this survey study, a samples of 159 respondents wasselected from four different occupations and four GCCcountries as representatives of the GCC societies andstates.To begin with, the crucial question of whether or notrespondents paid Zakat was addressed. All respondentsdeclared that they did. It might be claimed thatrespondents may not be relied upon in this question, sincethey cannot declare openly that they were abstaining fromperforming one of the five pillars of Islam. However, fromthe researcher's experience in Saudi Arabia and Gulf262

countries, Zakat is paid by all those eligible to pay.Moreover, since the rate is only 2.5 percent, it does notconstitute a burden on the Zakat payer. If the strongbelief of Muslims in compensation by Allah in thehereafter, is added to the picture, it will be clear thatat least the vast majority of respondents do pay theirannualZakat.Thus, since Zakat is actually being paid by (virtually) allZakat payers, the question then arises whether some sort ofregulation should govern it. Another question is whether tolet individuals pay Zakat at their discretion (the liberalcase), or whether an institution should play the role ofevaluating, collecting and distributing Zakat (thecentralised case). The advantage of the liberal case isthat Zakat payers have the opportunity to gain thespiritual (and social) benefit of personally giving moneyto the needy. They may be thanked and praised, their socialstatus may improve, and this in turn would encourage Zakatpayers to pay in the future. Even between the Zakat payerand God, the Zakat payer would feel more satisfied thathe/she had performed his/her duty to God if it is knownthat the money he/she gave actually went to and was spentby the poor and needy. Some people may not wish to declare263

the size of their wealth as they think it is a private andpersonal matter, not to be known by others. They prefer,therefore, a more discreet method of evaluating and payingZakat. Finally, although income tax has not yet beenapplied in the GCC countries, we may assume that whengovernments introduce other (earthly) taxes, many taxpayerswill attempt to evade paying taxes since they do notconsider they are committing a sin. If they were, however,to declare their real wealth for Zakat evaluation, thatwould undermine their tax evasion. Thus, it is preferablefrom this point of view to follow a liberal system in Zakatcollection and distribution.Having said that, the centralised system also has manyadvantages. In terms of redistribution of wealth, acentralised system would work better, since the centralZakat institution would cover the whole country rather thana small area. It might well happen that in some high incomeareas there are only a few needy individuals and far moreZakat payers, while in other areas only a few Zakat payersand many needy individuals. In the liberal systemtherefore, we may end up in an unfair distribution of Zakatmoney, where the needy of one area will collect far moremoney than those in other areas.264

Another advantage is the accumulation of technicalexpertise and information handling characteristics of acentralised institution. Muslims do not all know thecomplicated Zakat evaluation method and this can be greatlyfacilitated by a central Zakat body, which would have themeans and capability of providing Zakat payers with freeevaluation.Moreover, it might well be expected that some Zakat payersnot to know to whom they should pay Zakat. In other cases,Zakat payers may be by individuals who may be acting as tobe poor in order to obtain easy money. Indeed, there aremany people who use this kind of ruse and spend severaldays visiting tens of towns and cities to collect fromwealthy Zakat payers. This information problem would besolved by a central institution, as it would be easier toidentify these corrupt and false beneficiaries.Finally, there is what might be called the wholesale orbulk phenomenon. Suppose 100 Zakat payers each pay £50 inZakat. If they pay it separately they would be giving £50to a variety of needy people who, in turn, will tend to useit in consumption (since it is not an amount that allowsfor investment). If, instead, they paid it to a single265

institution, then that institution would have £5,000 whichcould be invested or used for important social projects.Any political, social or economic project cannot besuccessful without the agreement and co-operation of themajority of the population. If the GCC countries are tointroduce any Zakat system, they will have to draw it up inline with the population's beliefs and opinions. There aremany questions relating to the evaluation, collection anddistribution of Zakat, and understanding the attitude ofpeople towards these questions is crucial if the system isto have any chance of success. The aim of this survey hasbeen to assess public attitude regarding a number of veryimportant questions relating to Zakat. The sample wasdivided into occupation groups and country groups in orderto test for variations between occupations and betweencountries.7.2 Main conclusions from the survey studyIn the following paragraphs, the main findings of theprevious subsections are summarised.266

This survey reveals that almost 40 percent of respondentsobjected to paying Zakat to a central institution. This isnot unexpected for the reasons mentioned previously. Mostof these objecting respondents based their rejection ofthis proposal on the belief that Zakat is a personalrelationship between each Muslim and Allah. The respondentspreferred to pay Zakat personally since they do not seem totrust their companies (their employers) to pay Zakat ontheir behalf. Thus, if we assume that our sample isrepresentative of the whole population under study, thenattempting to impose Zakat may lead to approximately 40percent Zakat evasion. With such a high rate of evasion, wewould expect some distortion in distribution since someneedy individuals may end up being paid twice (once by theZakat Department and once by the Zakat evader) or not atall. It is therefore important that, before theauthorities impose Zakat, some compromise with Zakat payersshould be attained. One suggestion is to collect a certainpercentage rather than the whole amount. In this way most(but not all) individual (Zakat payers) and collective (theDepartment of Zakat) interests will be served.Notwithstanding the objections of some respondents, amajority of 62 percent do support imposing Zakat. This267

should encourage the authorities to work towards unifyingthe Zakat systems. Indeed, in this survey the toporganisation suggested for collecting Zakat was thegovernment (Zakat Department). Some consideration shouldalso be given, however, to giving some role to charitableorganisations (which was the second most popular choice).Banks, whether Islamic or non-Islamic, do not seem to be anattractive option, despite the fact that national banks cancarry out collection and distribution of Zakat cheaply andeffectively. As expected, Saudi respondents were the mostenthusiastic about the Department of Zakat as thisorganisation only exists in Saudi Arabia and they arefamiliar with this institution. Bahrainis, reflecting theirreligious variation, prefer charitable organisations.As expected, the distribution of the opinions on thedistribution of Zakat was not much different from that forcollection. The two most popular choices were theDepartment of Zakat and charitable organizations. -Coming to the next important question about the percentageof Zakat, we found serious disagreement amongst therespondents. Academics seem to be apprehensive about payingany percentage, accounting firms prefer paying 50% percentand government officials and investors prefer 100 percent268

of the total Zakat amount due. Overall, 100 percent camefirst but 75 percent came in second position. The objectionby academics and the suggestion by accounting firms to pay50 percent should not be totally disregarded. It does notseem unreasonable to suggest an incremental percentage,between 50 percent and 75 percent, depending on the amountof Zakat to be paid (50 percent for small amounts, to 75percent for larger amounts). In this way, Zakat payerswould be encouraged to declare their wealth and to pay thepercentage to the collection authority, while, at the sametime retaining some of the Zakat money for paymentpersonally to the recipients of their choice.The survey found little evidence that the respondents weresatisfied with the current method of evaluation for Zakat.Also, respondents appear to be dissatisfied with the waythe Department of Zakat collects and distributes Zakat,(with the exception of government officials who,unsurprisingly, show some level of satisfaction).Respondents from various countries do not seem to differ intheiropinions.As for the placement of Zakat in company financialstatements, the opinion was divided. Academics and269

government officials prefer a separate section, whileinvestors and accounting firms prefer the Shariahsupervisory committee report. There is also some indicationthat Kuwaiti and Bahraini respondents tend to prefer aseparate section, while Saudi and UAE respondents tend toprefer the Shariah supervisory committee report. Throughoutthe questionnaire, there is an obvious similarity andagreement in the responses of the Saudi Arabian and UAEgroups, on the one hand, and those of Kuwait and Bahrain ontheother.According to the respondents, the Zakat section in theannual report should be audited by the Zakat Department inthe first place, or, as a second choice, by the Shariahsupervisory committee. The four occupation groups wereunanimous in their choice (but not in the levels ofagreement, where academics had a significantly lower score,as they do not favour the involvement of religious scholarsin the auditing of Zakat accounts). There is also agenerally unified opinion on this question, but Saudirespondents had slightly higher scores in favour of theDepartment of Zakat.270

Most respondents prefer a partnership between government,Muslims scholars and academics to regulate accounting forZakat. In this study, there was no significant differencein opinion amongst the various occupation and countrygroups.Respondents suggest that the top four variations in Zakatcalculation were: expenses increased from previous years;bad debts; current expenses; and, end of service awards,respectively. There was difference in opinion, betweengovernment officials and investors regarding depreciation.It was suggested that the method used by the Department ofZakat should be changed. At the country level, there weresome significant differences in opinion. Bahrainirespondents gave depreciation the highest score while Saudirespondents gave it the lowest score. Kuwait gave end ofservice awards the highest score. Again, Saudi Arabia andUAE are similar.The lack of Zakat regulation was found to be the mostimportant reason for the low levels of Zakat collection.Other important reasons include Zakat evasion by companies,and the lack of awareness, by both the public andgovernment, that Zakat regulation is a serious publicconcern.271

There is a general agreement that the government shouldplay a major role in appointing and paying the Shariahsupervisory committee (SSC). At the same time, therespondents were against companies appointing and payingSSCs. It should be noted that the scores obtained fromacademics suggest that they would prefer a jointcontribution to the payment of SSCs (by government andcompanies).All the 7 benefits suggested to the respondents wereregarded as important. Overall, the most important itemswere (in order of importance): following one's religiousduty; social justice; promoting charitable organisations;and, economic efficiency. Many variations were noted inrespondents' priorities as to which item was mostimportant. Again, the academics' group seemed to be the oddone out by putting social justice at the top (religiousduty as second) while the other three groups classified itas second (religious duty as first). There was, however, nodifference between respondents from various countries.Respondents agreed with both the possibility and theimportance of the harmonisation of Zakat measurement anddisclosure. This suggests that attempts to harmonise the272

measurement and disclosure of Zakat would not be hinderedby a. popular objection. Not all occupation groups were sooptimistic, however. Accounting firms' low scores suggestsome doubt as to the possibility and importance ofharmonisation. As professional accountants, their doubtsshould be taken seriously. UAE respondents also showed somepessimism towards the possibility of harmonisation. It isthe researcher's suggestion that this pessimism wasprobably due to their own experience in a state consistingof eight emirates and where they may have seen howdifficult it was to unify or harmonise the administrativeand legal systems.7.3 Recommendations for future researchThis section outlines some important recommendations forfuture research which may help achieve the necessary degreeof reconciliation on the accountancy measurement ofelements of the Zakat base. These measurements are alsoassessed according to the standards and principles ofIslamic jurisprudence. Thus, many of the recommendationspresented here have not been discussed in the previoussection. Wherever relevant, the views of the respondentswill, however, be taken into consideration.273

7.3.1 Reconciling accountancy measurement andZakatbaseThe statistical analysis revealed several important issuesrelating to Zakat evaluation, collection and distribution.These issues are mainly in line with the research questionsdiscussed in chapter six. Many technical questions relatingto purely accounting practice could not be discussed withrespondents since they were not all accountants. However,many important conclusions were drawn and discussed at theend of the previous chapter.The majority of respondents were dissatisfied with thecurrent method used to evaluate Zakat. Moreover, manyZakat payers objected to paying Zakat to officialinstitutions as a result of their distrust of theircompanies. An attempt is, therefore, made to recommend someimprovements which would be in line with accountingprinciples as well as compatible with Islamic Shariah. Inthis way, it is hoped that Zakat payers would have moreconfidence in companies as well as official Zakatinstitutions.Accountancy profit represents one of the components of theZakat base of trade activity. Accordingly, it isrecommended that the elements of this base and its274

measurement be re-defined in such a way as to achieve therequired degree of compatibility between the accountancymeasure of the Zakat base of trade activity and itsmeasurement according to the principles of Islamic law.7.3.1.1 Working capital at the beginning of the periodWorking capital at the beginning of the period is themeasured working capital in accordance with the document ofthe financial situation prepared at the end of the previousfiscal period. In other words, measurement of the elementsof both the current assets and the current liabilities,according to their values in the previous year's balancesheet (excluding the various kinds of stock items andinvestments in the financial papers, which should be re-assessed at the end of the fiscal 'period underconsideration, in accordance with the current marketprices) when determining the Zakat base. Measurement ofthe working capital according to the suggested procedurewould achieve the following.1. Working capital measured at the beginning of the perioddoes not involve any growth that might have happenedduring the fiscal period as a result of the firm's275

ordinary and extraordinary activity. That excludes anyordinary or extraordinary profits or any other gains orinvested capital achieved during the fiscal period thatmay be included in the second element of the Zakat base,such as net profits obtained during the period.2. Adhering to the criteria of measurement and assessment ofthe current cost of the elements of current assets andliabilities. These are classified as follows:" Monetary elements, being those current assetsincluding debtors, notes receivable, bank, cash andother receivable balances, which consist of currentliabilities such as short-term loans, creditors, notespayable, overdraft bank withdrawals, and other payablebalances. These monetary elements are measured bytheir real values from the last year's balance sheetwithout any re-assessment, because these elementsrepresent a firm's fixed rights. In both cases theyare limited by a fixed number of monetary units. Theymay also be represented by a fixed number of monetaryunits under the disposal of the firm such as bankaccounts and cash, which are current accountsthemselves.276

" Non-monetary elements, which include for example someof the elements of the current assets such as variousstock piles, investments in bonds, shares and deeds,These elements must be re-assessed at the end of thefiscal period under consideration, since this can bepractically carried out and since they are actuallyaffected by fluctuations in prices due to cases ofeconomic inflation and recession.7.3.1.2 Net profit achieved during the periodNet profits achieved during the period are those measurableprofits according to the traditional principle of comparingrevenue with expenditure in the accountancy concept.Revenue and expenses are determined as follows.1. Revenue: this should consist of the following." Normal revenue the firm achieves due to selling itsgoods, produce or services to others. That is, revenueassociated with the normal activity of the firm." Non-normal revenue and other gains achieved by thefirm during performing its activities such as capitalprofits due to dealing with its fixed assets or those277

achieved incidentally, such as collected compensationsor any other invested capital.2. Expenditure: this should consist of the following." Normal expenditure such as the price of purchasinggoods and raw materials as well as salaries, wages,depreciation of fixed assets and any other expenditurerelated to a firm's normal activity." Incidentally occurring burdens and losses, such ascapital losses due to the disposal of fixed assets,and also paid compensations or penalties, and anyother incidental burdens or losses.Consequently, the author recommends the following methodfor the measurement of the Zakat base of trade activity.278

Table 7.1A sample of the recommended methodAna lytical entriesStatements Part(1) Part(2) TotalI .Wrkin Capital at the in in of the riCurrentsets (from last year's balance sheet)Inventory (after re-assessment at end of period)Investments in bonds (after re-assessment at end of period)DebtorsNotes receivableBankashOther receivable balancesTotal Current Assets-) Current Liabilities (from last year's balance sheet)Short-term loansreditorsNotes payableOverdraft bank withdrawalsOther payable balancesTotal Current LiabilitiesWorking CapitalNet Profits achieved duringhe eriodXxXxXxXxXxXxXxXxXxXxXxXxXxxXxxXxxvormal revenueon-normal revenue and other gainsTotal revenu-) Expenditureormal expenditureBurdens and other lossesTotal ExpenditureXxx-) Family expenses (basic needs)* XxNet Profitsakat Base* (Compared with the minimum)alculation of Zakat amount (2.5%)Deduct expenses it the company is private" Zakat Base = Working Capital + Net ProfitXxXxXxXxXxxXxxXxxXx7.3.2 Recommended treatment for certain types ofexpenditureThe survey results agree with the current official Zakatpractice with regard to a number of issues. There were,however, many items on which the respondents expresseddissatisfaction. Therefore, an attempt is made to suggestrecommendations for treating some of the items.279

7.3.2.1 Depreciation of fixed assetsAs reported in the previous chapter, there was disagreementamong respondents regarding depreciation. It is suggestedthat measurement of the depreciation of fixed assets shouldbe carried out on the basis of the followingrecommendations.1. Depreciation must be calculated from the outset of thelife of a fixed asset; with percentages that correspondwith the nature of the fixed asset itself; with thecircumstances of its utilisation; and, with the nature ofthe firm's activity. This is to present guided ratherthan obligatory depreciation percentages, provided thatthey can be exceeded under certain circumstances.2. Depreciation must be calculated on the basis of thecurrent value of fixed asset when measuring the Zakatbase. This must also be in accordance with the criteriaof measurement and assessment, on the basis of currentcost, when determining the Zakat base. Consequently,this would achieve an appropriate measurement of a firm'snet profits at the end of the period and, in observanceof the criterion of protecting capital, and enabling thefirm to replace its fixed assets, which ensure theircontinuity.280

7.3.2.2 AllowancesThe treatment of bad debts was found to be the second topvariation in Zakat evaluation. Allowances to firms are madeto meet any possible losses such as allowances for baddebts. These should be discounted from all types of firmsrather than from banks only, as is currently practised bythe Saudi Department of Zakat and Income. That is providedthat these allowances are added to the Zakat base once thelosses they were established to meet did not materialise.7.3.2.3 Previous year's expenditureIn this survey, expenditure from previous years was the topvariation in Zakat calculation. It is suggested thatexpenditure from a previous year(s) should be discounted,provided that they are real and supported by authenticdocuments, and that they have been actually paid during theZakat year under consideration. This is due to the factthat they are a burden on a firm that had not been deductedduring the previous year(s). Consequently they are regardedas discountablecosts.281

7.3.3 Academic fee expenditure paid to employeesThe researcher suggests that these fees, paid by a firm toits employees, must be raised to a suitable level (such as10,000 Riyals instead of 5,000 Riyals). Also that the SaudiDepartment of Zakat and Income must allow a discount, sothat the paid sum is in proportion to the increasing costsof education and children's teaching requirements. Thisalso takes into consideration increasing costs of living ingeneral. This allows firms to contribute effectively toprompting their employees to educate their children, whichin turn helps reduce illiteracy in society.7.3.4 Amount of Zakat collected by institutionThere was serious disagreement concerning the percentagesof Zakat that should be collected by Zakat institutions.The researcher suggests that it is necessary to give theZakat payer the opportunity to participate in payments ofZakat that have been deducted from his/her wealth andactivities. This is crucial, since allowing the Zakat payerto pay some of the Zakat money personally would increasethe awareness that he/she is indeed observing thisimportant pillar of Islam. One suggestion would be that theDepartment of Zakat should collect a proportion of the282

Zakat at 1.5 percent of the base rather than all the Zakatat 2.5 per cent of the base. The Zakat payer is,therefore, left with the rest of the Zakat, that is, 1 percent of the base, to pay to those he/she thinks the mostdeserving, including the poor, the needy and others. Otheralternatives, such as an incremental percentage between 50percent and 75 percent of the 2.5 percent of the basesuggested previously, could also be implemented.7.4 Further recommendationsThis thesis has examined the possibility of establishing anaccounting system for Zakat in the states of the GCC. Themain objective was to test the existing social, economicand religious environments in these states, from afinancial perspective, and whether they could provide thebasis for a solid infrastructure for a unified andharmonious accounting system of Zakat. These environmentalissues cannot be fully appreciated, as major determinantsof co-ordination, without first examining the will of therelevant governments to adopt a common understanding onsuch a system and, more importantly, the willingness of thepeople (Zakat payers) of these states to accept a unifiedsystem.0283

For this purpose, this study has developed a path ofenquiry which the researcher hopes will lead to theformation of a definite frame of perceptions to help in thedrawing up of Zakat policy in the future.The field study was undertaken in the Gulf States as theyhave (except Saudi Arabia) identified a potential readinessto apply a unified Zakat system. In anticipation of thesenew tendencies growing in the Gulf States towards forming aZakat institution, the study has tried to establish a basisfor accounting procedures which respond, firstly, to thereligions rules and, secondly, to present day developmentrequirements.Under the current conditions of the Zakat Department, thesurvey study suggests that about 40 percent of Zakat payerswould attempt to evade paying Zakat to officialinstitutions. Although these Zakat payers do not reject theduty of paying Zakat, they believe that it is theirprerogative to give Zakat to the recipients of their ownchoice. Moreover, they strongly believe that Zakatrepresents an exclusive relationship between individualMuslims and Allah, and some of them do not trust theircompanies to evaluate and pay Zakat on their behalf.284

Traditionally, Zakat was paid to the state at the time ofthe Prophet (pbuh). It is not easy, however, to reverse aculture that has been formed over centuries and one has tobe practical in suggesting solutions to this problem.It should be clear that not accounting for 40 percent ofZakat payers may well lead to the misallocation of Zakatfunds. So, the aim is to encourage these pessimistic payersto rely more on official Zakat institutions. One way ofdoing that is to offer them a percentage of the Zakat moneyto pay personally (as suggested earlier) while, at the sametime, imposing penalties for Zakat evasion. In addition,the government should carry out an awareness programme inwhich the Department of Zakat is explained and in which theimportance of paying Zakat to central authorities isunderlined.Another important aspect is transparency. Indeed, in orderto improve the trust of Zakat payers, Zakat institutionsshould publish a detailed report providing relevantinformation such as the amount of Zakat collected and therecipients of the distributed funds. Because of the concernexpressed, such reports should include tangible informationwhich could be understood by the average Zakat payer. For285

example, the report can state the number of orphans andwidows helped by the Zakat institution. In this way, Zakatpayers would know that their money is indeed spent in goodcauses, something they themselves would have done.Thus, with respect to the centralised and liberal Zakatsystems discussed in chapter seven, it appears that a mixedsystem would, at least for the present and the near future,be a more suitable option to adopt. By adopting a mixedsystem, it is believed that a compromise might be reachedto accommodate individuals' aspirations and personalsatisfaction, as well as the institutional social goals ofthe Muslim State. In this respect, charitable organisationsshould be allowed to co-operate with governmentalinstitutions such as the Department of Zakat in SaudiArabia. They should be given a greater role, especially incountries like Bahrain and Kuwait. In these two countries,a sizeable proportion of the population is Shiite and wouldnot be expected to fully co-operate with the Sunniauthorities. A compromise would be to set up charitableorganisations run by representatives of the Shiitecommunity but supervised by government.One important issue is the possibility of harmonising theDepartment of Zakat in the GCC countries. This is one286

eason why the survey study covered four main GCCcountries. Opinions of the respondents from the fourcountries, studied in the previous chapter, are crucial tothe shedding of some light on the possible problems thatharmonisationmay face.To begin with, the study reveals a split in opinion thatreflects differences in the levels of religious involvementin the states under consideration. Saudi Arabia and the UAEare more traditional and respondents from these twocountries had similar views regarding various issues onZakat. On the other hand, Kuwaiti and Bahraini respondentshad similar, more liberal, opinions. For example, whileSaudi Arabia and UAE respondents prefer the placement ofZakat in the Shariah supervisory committee report, Kuwaitiand Bahraini respondents prefer a separate section.The importance of the harmonisation of Zakat wasacknowledged by most respondents, although accounting firmsand UAE respondents showed some doubt as to the possibilityof harmonisation. It is, therefore, suggested that theharmonisation of Zakat would be a difficult and longprocess. A two-stage process is suggested, which startswith a bilateral harmonisation based on the closeness of287

the political-religious system, as well as upon publicopinion. For example, the survey indicates that anyharmonisation between Saudi Arabia and UAE would be morelikely to succeed because of similar features between thetwo countries and populations. Accordingly, Kuwait andBahrain might also easily harmonise their Zakat systems.Once these two harmonised systems are functioning, then thesecond stage would consist of bringing the two alreadyfunctioning systems together and building a unified GCCsystem. The main focus points of the process ofharmonisation should be Zakat regulation, Zakatinstitutions, the role of government, accounting standards,and Zakat evaluation. In many of these items, variations inattitude were found among the various countries, whichsuggests that the task ahead might be very difficult.If there is the political will, however, and consideringthe many advantages that can be gained from harmonisation,this possibility should not be ruled out. Indeed, the GCCis already discussing the possibility of unifying customsduties and tariffs, and many other administrative, economicand political agreements have already been achieved. It is,therefore, suggested that a committee at the GCC level288

should be set up to at least discuss the broader issues ofZakatharmonisation.289

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Appendix

CARDIFF BUSINESS SCHOOLDirectorProfessur Ro_er \'lanstiddMA PhD\IÜktIe Fast Bankin_ & AccuuntinaR' irch Gn, up t \IEBARG,Co-Onlin tior Dr Kaumal Na>cr BA \1SL I'hD.. dUNIVERSITY OFCARDIFFCardin' Business SchoolAherconwav Building,Colum DriveCardiff CFI 3ECýUnited KingdomFax (() 1 22) 874419 Telex: 498635Tel (0I 22) 874000TO WHOM IT MAY CONCERNDear Sir,Mr Abdullah AL-Utaibi is a full time PhD student at Cardiff Business School andundertaking a research entitled "Zakat Calculating in the Gulf Co-operationCouncil Countries"Mr Al-Utaibi is making progress with his PhD research and I believe that he will makean important contribution to the understanding of Zakat Calculation in the Gulf Co-operation Council Countries. This can only be achieved with your co-operation.Hence, I would certainly appreciate your support and collaboration in answering hisquestionnaire. You will be interested in the result of the questionnaire.May I emphasise that all individual information is treated in strict confidence andreplies are coded so that unauthorised personnel cannot access this information.I appreciate your co-operationYour sincerelyDr Kamal NaserThesis SupervisorUniversity of Wales College of Cardiff

Section A: Personal Information1. Would you please state where you are from?a) Bahrain Q b) Kuwait Q c) Saudi Arabia Qd) United Arab Emirate Q2. Please state your age.a) Below 30 years Q b) 31- 40 years Q c) 41- 50 years Qd) 51- 60 years Qe) Over 60 years Q3. Please state your highest level of education.a) School Qc) Junior College Qb) High School Qd) University Undergraduate Qe) PostgraduateMA Q MSc Q MBA QPhD 13f) Others, please specify4. If you have completed a university degree(s), please state the country from whichyou obtained your degree(s)?5. Please state your previous and current job positions and indicate the approximatetime you have occupied these positions.Title Previous job Current job Less than 175 6-10 More thanposition position. 1 year years years 10 yearsCompany directorAccountantGovernment officialAuditorUniversity lecturer,Stock market officialBankerFinancial analystJournalistOthers; please specifySection B: Investment.1. Do you hold any kind of investments?Yes Q No Q1

S2. If the answer to question 1 is yes, then please state your level of investment?Company sharesGovernment bondsIslamic bankLandNational bankOthers, please specifyLess than S5,000 $5,001-10,000 10,001-15,000 15,001 and over3. For how long have you been involved in investment in shares?a) Less than one yearc) 6- 10 yearsQ b) 1- 5 yearsQQ d) More than 10 years Q4. Do you pay zakat on any of your investments?Yes 13 No 135. If the answer to question 4 is yes, do you believe it is fair for zakat to becompulsory deducted for companies?Yes 11 No 136. If the answer to question 5 is no, please indicate your level of agreement with thefollowing statements in relation to why you consider it to be unfair?Zakat is relation between the person and AllahI do not trust the companiesI do not trust Dept. of zakat evaluationI like to pay zakat by my selfStrongly,agree.Agree indifferent' disagree ; 'strongly. -disagreeSection C: General Questions related to Zakat1. Please state to the extent to which you agree or disagree with the followingstatements?Zakat should be. collected by Strongly agree Agree Indifferent Disagree Strongly disagreeGovernment (Dept. of Zakat)Islamic banksNational banks :,.Charitable organisations,2. In respect of who should distribute Zakat, please indicate your level of agreementwith the following?Zakat should be distributed by'- Strongly agree' Agree' Indifferent Disagree Strongly disagreeGovernment (Dept. of Zakat)Islamic banksNational banksCharitable organisations2

3. To what extent do you agree or disagree with each of the following statements?Zakat should be paid to collection authority, 25% othe total amount of Zakat50%75%100%',StronglyagreeAgree Indifferent Disagree Stronglydisagree4. To what extent do you agree or disagree with each of the following statements?= StronglyagreeThe current method of calculating zakat is satisfactoryThe current method of collecting zakat is satisfactoryThe current method of distributing zakat is satisfactoryagree indifferent disagree stronglydisagree5. Below are a list of statements referring to possible reasons tor the low level of zakatcollection in GCC countries, please indicate your level of agreement with each of thefollowing statements?Strongly4greeAgree ; Indifferent Disagree Strongly:`DisagreeLack of zakatregulation,Lack of Religious practiceCömpanie's try" to avoidzakat paymentsThe need for zakatregulätion has not yet been seenas a seriouspublic concern in some GCC countriesZakat regulation requires the specialities andhuman resources which the governments do notyet possess, The problem of enforcement6. Below are a list of statements relating to the potential benefit of the implementationof Zakat across GCC countries, please indicate your level of agreement with each ofthe following statements?Satisfy, religious dutiesImprove social: justiceImprove economic efficiencyImprove the reputation of companiesIncrease local investmentSAgee Indifferent Disagree' Strong SY lagreeDisagree,. -Promote charitable organisationImprove the quality of corporatefinancialreportsSection D: Zakat and financial report Section1. Please state the extent to which you agree or disagree with each of the followingstatements?Place öfzakit statement anüüal shöüld be', Stronigly. agree agi-ce indifferent disagree. - Strongly disagreeina separate sectionshariah"advisory and supervisory reportdirector's report ""-chairinan's reportaccounting policiesnotes to the financial statement .3

2. To what extent do you agree or disagree with each of the following statements?Who should audit zakat accountDept. of zakatShariah advisory and supervisoryAccountant from Islamic bankAuditorsOthers, please specifyStronglyagreeagree indifferent disagree strongly disagree3. To what extent do you agree or disagree with each of the following statements?Who should appoint shariah supervisorycommittee?CompaniesGovernmentStrongly agiee indifferent disagree stronglyagreedisagreeSalaries for shariah süpeivisory committee shouldbe paid by:Companies .`Government4. Please state to what extent you agree or disagree with each of the followingstatements:The Zakat measurement should be regulated in the:GCC countriesThe zakat disclosure should be, regulated in theGCC countriesThe zakat regulation in Saudi Arabia should beused as basisfor the other GCC countriesThe current zakat regulation in Saudi Arabia shouldbe altered in useCompanies to be requested to include section intheir annual report addressing ZakatA distinction should be made between Zakat paidby'individuals and Mat paid by, commercial firmsStrongly Agree Indifferent : Disagree Stronglyagreedisagree5. Generally Accepted Accounting Principles permit flexibility in profit measurementand this impacts on the calculation of Zakat, which of the following items bring aboutthe greatest variation in accounting measurement (please state the extent of youragreement)?DepreciationBad debt.::Allowances & reservesExpendituresEnd of service rewardsFees of firms board of Director'sSalaries, wages & similar itemsStrongly agree Agree Indifferent. , Disagree Strongly disagreeLoss from previous years4

6. In terms of who should regulate Zakat, please indicate the level of agreement witheach of the following statements?GovernmentMoslem scholarsAcademicsGovernment with advise from Moslem scholarsGovernment with advise from academicsGovernment with advise from Moslem scholars andacademicsStronglyagreeagree indifferent disagree stronglydisagreeSection E: Zakat harmonisationSection1. Do you think harmonising zakat regulation is possible in the GCC countries?Yes 0 No 02. Please state to what extent you agree or disagree with the following statementsHarmonisation of zakat measurement ispossible in the GCC countriesHarmonisation of zakat disclosure ispossible in the GCC countriesHarmonisation of zakat measurement isimportant in the GCC countriesHarmonisation of zakat disclosure isStrongly agree agree indifferent disagree Strongly disagreeimportant in the GCC countries ` :..

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" Royal Decrees and Orders "

No: 17/2/28/8634Date: 29/6/1370 H7/4/1951(l)By the Grace of GodWe, Abdul Aziz Bin Abdul Rahman Al FaisalKing of Saudi Arabia,In accordance with Royal Decree No. 17/2/28/3321 of 21 Moharram 1370 H(2/11/50) providing for the institution of income tax, and in application of theShariah provisions (Islamic law), and in accordance with our Minister of Finance'ssubmission. --We decree the following:Article 1- Provisions of Royal Decree No. 17/2/28/3321 of 21 Moharram 1370 H.(2/11/50) are applicable to non-Saudi individuals and companies.Article Il-Zakat tax (Moslem tithe) shall be collected from individuals andcompanies of Saudi nationality in accordance with the provisions of Islamic law(shariah).Article III-Provisions of this Decree shall be enforced as of the date of applicationof Royal Decree No. 17/2/28/3321 dated 21 Moharram. 1370 H.Article IV- This Decree shall be communicated to those concerned with enforcingits provisionsRoyal Signature/1) Amended by Royal Decree No. 171 128/8799 of 8 Ramadan 1370 H. (13/6/51) which In turn war cancelledby Royal Decree No. 17/21281577 of 1413176 H. (19/10/56).

ZAKAT REGULATIONS (1)Article I: The provisions of Royal Decree Not 17/2/28/3321 dated 21 Moharram1370 H (2/11/1950) shall be applicable to non-Saudis.Article II: Saudi citizens and companies shall be subject to zakat in accordanceWith Shariah of IslamArticle 111: The provisions of this Decree shall be- effective as of the date ofapplication of Royal Decree No. 17/2/28/3321 dated Moharram 21,1370(2/11/1950 A. D)Article IV: This Decree is circulated to those responsible for its implementation./by Royal Decree No 17/2128/8634 dated 29/6170423

Date: 6/8/1370 H.Ministerial Resolution No 393The Minister of Finance:In accordance with Royal Decree No. 17/2/28/8634 dated 29/6/70 H. (7/4/51)providing for the collection of Zakat from Saudi individuals and companies, inaccordance with the provisions of Shariah Law, and whereas it is necessary to setup instructions regulating the assessment and collection of Zakat from those liableto pay it.Resolves the following1- All Saudi companies (1) or individuals, whether male or female, adults orminors or persons legally incompetent, shall be liable to pay Zakat at the end toeach year commencing the first of Moharram 1370 (13/10/50) in accordance withthe provisions of Shariah law. (2)2- Capital and earnings therefrom, all proceeds, profits and gains obtained bySaudi nationals or companies shall be subject to Zakat in accordance with theprovisions ofShariah law.3- Capital and earnings therefrom, all proceeds and profits obtainedby Saudisliable to pay Zakat, from business, industry or personal work, property ormonetary acquisitions of whatever kind or description, including commercial andfinancial deals and dividends, and generally all income on which Shariah haslevied tax, shall be liable to Zakat.4- Zakat shall be assessed on all commercial goods, properties and monetaryacquisitions on the basis of their value, which shall be estimated at the end of eachyear in accordance with the provisions of Shariah law.5- Assessment of Zakat on sheep and cattle and plants in accordance with ordersand instructions issued to this effect, shall be collected in accordance with theprovisions of Shariah by the method currently followed.6- All individuals and companies engaged in commercial or industrial activitiesshall keep organised accounting records showing the capital, the proceeds andexpenses relating to the business during the year so that they can be relied on forthe assessment of Zakat. These books and records should be certified by acommercial court or public notary in areas where such courts are in existence.1) See Ministerial letter No. 11161 dared 817/90.2) Paragraph 10 of the Council of Ministers Resolution No. 55 of 2/5/75 N (27/12/55) published in Um Al-Qura (officialGazette) in issue No. 1653 dated 8/7/76 H (812157) stipulates' that! ""Applicants for Saudi nationality or those requestingtreatment as Saudi, whose applications are already approved, shall not be given a certificate to this end before the decisionsgrantng them Saudi nationality are published in the official Gazette Paragraph 7 stipulates that when the application isapproved, the office concerned shall send a true copy of the decision to the Official Gazette for publication. Article 11provides after publication the applicant should be notified by registered mail that he is considered as a Saudi as from thedate of publication.

7- For those who do not keep reliable books, Zakat shall be determined by estimatingthe value of goods, equipment- and machinery, chattles and properties subject toZakat, on the basis of the assets at the end of the year-or by estimation for those whohave no apparent assets. (1)8- All who are liable to Zakat, individuals or companies shall submit during the firstmonth of each year to the financial officers responsible for the collection of Zakat, adeclaration showing the value of funds, goods and properties, each acquisition andhis profit therefrom, and the amount ofZakat due.9- The person authorized to assess and collect the Zakat shall check the informationsubmitted by individuals and companies, and shall reserve the right to check thebooks and records of the Zakat-payer, when necessary, to ascertain the accuracy ofthe information. When satisfied, he shall inform the Zakat-payer of the amount heshould pay by sending him an official notice from a book with stub.10- Should the Zakat-payer find that the amount he is required to pay does notconform with his actual circumstances, he may object to the notice received bymeans of a certified application sent by registered mail to the authority which sentthe notice, within 15 days of receiving that notice; otherwise his right of objectionwill be forfeited and he will be obliged to pay the amount notified to him.11- The authority which receives the objection shall. refer it to the FirstInstance Committee (2) composed ofthe Amir of the area orhis delegate (aschairman), the judge and senior financial officers in the area, and three of thedignitaries of the people of town, to be chosen by the Municipal Council eachyear, as members. This committee shall investigate. the objections of the Zakatpayers and may inspect the books, records, accounts and documents ofestablishments and businessmen and any other document that may help inestablishing the true situation. The committee shall make a decision within 15days from the date of objection.1) The judicial Presidency, in its No. 3364 dated I3/5/72 A. H (2911/53t addressed to the Bureau of Revenues said, "you haverequested us to inform you whether production machinery, plants sad factories are considered as capital from the point of viewof Shariah and whether they are subject to Zakat. We would like to advise you that what you have mentioned is not subject toZakat because it is not meant for training. "Another ruling issued by His Eminence the Grand Mufti under No. 247 dated 15/6/75 A. H. (2916/56) and sent to theDepartment of Zakat and Income Tax by the Deputy Minister, of Finance under No. 154544-1 dated 3/7/75 A. H. (15/7156)which states that nothing which is not prepared for sale is subject to Zakat, whether real estate, engines, machinery, equipment,houses, ships etc., whether these are intended for letting, utilization or acquisition, unless intended for trading in that they werepurchased for the purpose of resale at a profit. In such cases the goods are meant for trading and therefore should be estimatedat the end of the year for which zakat is due. This confirmed by the prophet's saying "God's Apostle, peace be with him, orderedus to set aside the Zakat from all what is prepared for sale" told by Abo Dawood and orhers.2) the order sent by the Ministry of Finance and National Economy to the Department of Zakat and Income tax under No526/4/2 of M/l/77 H (g/M157) approved the formation of the First Instance Committee from the Amir of the area or hisdeputy as chairman, and the director of the financial branch and one of the members of the Municipal Council or one ofthe members of the administrative council, and the director of Zakat and Income tax branch, as members

12- If it appears to the finance department or to the Zakat-payer that an error hasbeen made or the decision of the First Instance Committee is incomplete owingto it investigations or checking, any party thereof may appeal against thedecision of the First Instance Committee to the Committee of Appeal providedfor in Article 26 of Resolution No. 340 dated 1 Rajab 1370 (8/4/51) and withinthe same period prescribed herein. The Committee of Appeal shall take adecision within one month from receipt of the appeal.13- An appeal by either the finance department or the Zakat-payer shall not bea justificationfor postponding payment of the Zakat; rather the person liableshould pay the Zakat before making this appeal. If the appeal results in areduction in the amount of Zakat due, the extra amount charged will be refunded.In opposite case the taxpayer shall pay the balance. The appeal shall not beconsidered valid unless the Zakat-payer attaches a duly certified copy of thereceipts against payment of the Zakat.14- The First Instance Committee or the Committee of Appeal may call theZakat- payer or his representative to appear before it and he should respond. Ifhe fails to appear before either of the two committees when called, without legalcause, his objection or appeal shall be rejected.15- Provisions of Articles 21 and 31 of the Resolution No. 340 of I Rajab 1370(8/4/5 1) shall be applicable to those liable to pay Zakat(2)16- The employees referred to in Articles 18 and 19 of Resolution No. 340 dated1 Rajab 1370 H (8/9151) shall be charged with the responsibility of assessing andcollecting Zakat in addition to their responsibilityfor assessing and collectingincome tax.17- In case of ambiguity or delay in the application of-any of the articles of this Re-solution, it should be referred to us for interpretation or explanation.18- -The officials responsible for the application of this Resolution shall keep therecords necessary for assessing and collecting Zakat and shall keep on file anyobjections thereto, together with notices to Zakat payers and the informationobtained from them.19- Sufficient copies of this resolution shall be made, to be published in local newspapers and to be distributed to all finance for implementation thereof.20- The Director General of Finance-shall supervise printing of books, notices anddeclaration forms specified in this resolution-and shall distribute them to the financedepartment as soon as possible.Minister of Finance2) HRH the Prime Minister's order to H. H. the Minister of Interior No 75 dated 7/1/1374 (5/10/54) cone the refusal onthe part ofto pay half the amount of Zakat' "He should be ask to pay" See also order No 3135 dated21/2/82 H

No: 17/2/28/8799(»Date: 8/9/1370 H13/6/1951We, Abdul Aziz Bin Abdul Rahman Al-Faisal Al-SaudKing of Saudi Arabia.By the Grace of God, and having considered our Decree No. 17/2/28/3321 of 21Moharram 1370 H. (2111/50) providing for the institution of income tax, and afterconsidering our Decree No. 17/2/28/8634 of 29 Jumad 11,1370 H. (714151)providing for the amendment of the first Royal Decree and ordering that only Zakatbe collected from Saudi nationals and that the application of income tax be restictedto non-Saudi, and whereas Zakat is higher than income tax, and in view of what wehave felt of the desire of our people to distribute by themselves part of the zakat dueon their properties and monies to their poor relatives or dependents in whose favourZakat was imposed by God,We order the following:Article 1- Legal Zakat due on money and goods is one-fourth of one-tenth(1/4 by1/10) = 2.5 per cent. J-he Financial Department shall collect from Saudis one-eighthof one-tenth (1/8 by 1/10) = 1.25 per cent and the balance shall be left with the liablecitizens to distribute themselves among the needy people in whose favour- ofGod hasimposed the Zakat, and God will judge them.ArticleIl- Zakat on cattle and land crops shall be collected by the concernedauthorities as before.Article III- Those concerned shall enforce this Decree.1) Royal Decree No. 17/2/281577 of 14/3/76 H. (19/10/56) cancelled both Royal Decree No. 8634 and Royal decree NO. 8799.

In The Name of God the Merciful the CompassionatePermitting the people of Al-Qassim to collect and distributethe Zakat on properties themselves..From Abdul Aziz Bin Abdul Rahman Al-FaisalTo Our Son Abdallah Bin Abdul Aziz Bin Mussa'd -Peace, Mercy and the Blessings of God -be upon you. You already know thatobserving the orders of the Glorious God is a Religious duty. God has imposed on hisworshipers the Zakat which His prophet (God's peace and blessings be upon. him) hasdefined as the third among the five pillars of Islam after the two professions of faithand prayer. To desist from paying Zakat is like preventing heaven from raining, ashas been told by the prophet of God. We order that Zakat on property be collectedfrom all owners of property and nobody is to be exempted. You should select two orthree of the notables under the supervision of the Qadi (Judge) and every Moslemshould pay to them the Zakat due from him, under your's and the Qadi's supervision.For ourselves we are not in need of it, but we have two purposes in mind: first, thatpeople should follow the rituals of God and, second, that the Zakat be distributed tothose who are in need of it from among the poor and destitute people. We hope thatyou will give full attention to enforcing our order and nobody is allowed to deviatefrom paying it.12 Ramadan 1371 H. (516152) Royal Seal

No. 1 7/2/28/577Date: 14/3/1376 H19/10/1956After reviewing income tax regulations approved by Royal Decree No.17/2/28/3321 dated 21 Moharram, 1370 H (2/11/50) and amended by RoyalDecree No. 17/2/28/8955 dated 30 Ramadan 1370 H. (5/7/55) andby RoyalDecree No. 17/2/28/576 dated 14/3/76 H. (19/10/56), and in considering theZakat Orinance issued by Royal Decree No. 17/2/28/8634 dated 29 Jumad II,1370 H (7/4/51) and amended by Royal Decree No. dated 8'-17/2/28/8799Ramadan 1370H (13/6/5f), andHaving taken note of the Council of Ministers' Resolution No. 31 of27/2/76 H.(2/10/56).We decree the Following:Article IThe full amount of Zakat due shall be collected in accordance with the rules ofthe Shariah of Islam from all our Saudi citizens as well as from all Saudicompanies the, partners or shareholders of which are all Saudis, andpartners in companies formed of Saudis and non-Saudis (l)from SaudiArticle IIRoyal Decree No. 17/2/28/8634 of 29/Jumad II, 1370 H. (7/915 1) and RoyalDecree No. 1712t28/8799 of 8 Ramadan 1370 H (13/6/51) shall nolonger beeffective.Article 111This Decree shall be published and enforced as of 1 Moharram 1376(818156). The Council of Ministers shall issue the decisions required for itsimplementation based on proposals by the Minister of Finance.Royal Seal1) Half of the Zakat only was later collected in accordance with the Royal order No. 10079 dated 7/9t76 H. (714/56)furnished to the Department of Zakat and Income tax by letter from H. H. Minister of Finance No. 100011 dated 7/9t76 11.(714157).

Royal OrdersRoyal Orders were issued to treat Bahrainis, Kuwaitis and Qataris as Saudis and tocollect Zakat from them instead of income tax.The following are the Royal Orders:Bahrainis -10236 to Saud Ibn: Jliwi10237copy to Mohammed Sorour Sobban on 14/4/1376 (12111/56)."You are requested to treat the people of Bahrain as Saudis with respect to income tax.

Royal OrderTo: Mohammed Sorour -RiyadhBahrains: No. 10079 -7/9/76 H (1714/57)Many of the people of Najd and Hijaz requested H. M. the King to reduce theZakat paid in cash so that they may distribute it themselves to poor and needy peopleof their relatives and to widows. His Eminence Sheikh Mohammed Bin Ibrahim wasrequested to give his opinion and he decided that they may be given half the zakat todistribute themselves to the needy people, provided that it is not used for any otherpurpose. His Majesty ordered you to be informed that Zakat may be expended onlyfor charitable purposes.Faisal

Royal OrderKuwaitis: Royal Order addressed to H. H. Amir of the Eastern Province No.800 dated 9/11/1376 H (16/8/1956) and referred to H. E. the Deputy Ministerin the region under No. 337/1 dated 11/1/76 (18/8/1955)."Kuwaitis should be treated as Bahrainis.Ali Abdul Rahman Al-saimy is to have similar treatment and is exemptedRoyal OrderQataris: No. 4899 dated 27/5/1377 H (19/12/1957)H. E. Minister of Finance and National Economy."We return to you your Memo No. 6027/1 dated 9/5/1377 H (1i12/1957)withrespect to the letter of H. H. the Amir of the Eastern Region concerning thetreat-ment of Qataris as Saudis, Bahrainis and Kuwaitis in that they are subject toZakat only. Qataris are like Saudis in that they are allowed to make businessin SaudiArabia but were subject to tax. When this matter was submitted to HisMajesty, we received letter No. 4/3/2100 dated 23/5/1377 H. stating that-H.M. orders that Qataris be treated like Babrainis and Kuwaitis".ForPrime Minister

No. 6115/1(1)Date: 5/1/1383 H.With the Help of Almighty Godand In the Name of His Majesty,We, Faisal Bin AbduLAziz AI-Saud,Viceroy of Saudi Arabia,After reviewing Royal Order No. 42 dated 9/10/81 H. andHaving taken note of Articles 19- and 20 of the Council of Ministers' Regulationsissued by Royal Decree No. 38 of 22/10/77 H., andIn consideration of Royal Decree No. 8634 dated 19/6/70 H and Royal DecreeNo. 17i2/8799 of 8/9/77 H. and Royal Decree No. 17/2/577 of 14/3/76 H., andHaving reviewed the Council of Ministers' Resolution No. 645 of 29/12/82 H., andIn accordance to what has been submitted to us by the Prime Minister.We Decree the following:1- Zakat shall be collected in full from all joint-stock and other companies7 as wellas from individuals who are liable to pay Zakat.11- All amounts collected shall be remitted to the Social Security Department.111- The Prime Minister and the Minister of Finance and National Economy shallimplement this Decree of ours.SignedCirculated by ZIID under No. 748 dated 3/2/S3 H

No. M/76Date: 30/10/1396HWith the Help of Almighty GodWe, Khaled Bin Abdul Aziz Al Saud,King of Saudi Arabia.Having reviewed articles 19 and 20 of the council of ministers' resolution issued byRoyal Decree No. 38 dated 22 Shawal 1377 HAnd having reviewed Royal Decree No. 61 dated 5/1/83 H ordering the collection ofzakat in full from all companies and individuals subject to zakat,And having considered the Council of Ministers' Resolution No. 13/10/96We Decree the following:1. Half the zakat due on cash and goods shall be collected from zakat payers the otherhalf of zakat due from them shall be distributed by them to eligible personsExcluded are the joint stock companies which shall pay zakat due in full. This shall takeeffect for the financial year ending by the end of 1395 H or 1975.2. Collected zakat shall be remitted, so that it can be distributed by those concerned toeligible persons.3. The Minister of Finance and National Economy shall issue the resolutions necessaryfor the execution of this Decree.Khalid

'Zakat & Income Tax Department Branch.Branch: ---------------No.Date:Enclosures:No. of File:Notification on elements of zakat assessment on activity otherthan imports and contractsMr- --------------------As your financial year has ended and the date for payment of zakat is due on youractivity for the year .....................And after reviewing your file, we state hereunder the elementssubject to zakat for the said year.Capital SR H+ 15% profits from sales ----------------------(estimated at )Amount subject to zakatZakat 2.5%Paid on account (date) ----------------------Balance dueYou are requested to pay the amount due from you i. e. (SR------------------With our regardsBranch Director

Ministry of Finance & National Economy,Zakat & Income Tax DepartmentBranch:.........No.DateNotification on assessment of taxable elements on imports and contractsMr ..................As your financial year has ended and payment of tax is due on your activity forthe year ................And after reviewing your file, we detail hereunder the elements on which tax isassessed for the said year.SR15% profit on imports totalling ()..............10% profit on imports totalling ()...........5% profit on imports totalling ()Profits from other activities totalling ()..............-----------Total ProfitsExemptionTaxable incomeTax Paid on account, atbalance dueTax account10,000 x 5% _-------------20,000 x 10% _ ------------30,000 x 20% _ ------------over 30.000 x 30% _-------You are requested to pay the above amount' i. e. (SR) and we will be pleased toreceive your comments on the estimated value of imports or sales, within onemonth from receipt of this notice so that we may be able to review yourfile inAccordance with the documents submitted. Rates of profits are not subject toreview because these are prescribed in accordance with the Council of Minister'sResolution on profits on imports, and in accordance with paragraph 2 of Article4 of income tax regulations on\profits form activities other than imports.If the Branch does not receive your comments on the value of imports or saleswithin one month of this notice, it will be considered as the final assessment oftax to which will be added the delay penalty legally prescribed.

Kingdom of Saudi Arabia.Ministry of Finance & National Economy,Zakat & Income Tax DepartmentBranch:.........No. ----Date: ----Notification on assessment of taxable elements at activitiesother than imports and contracts.Mr ..................As your financial year has ended and payment of tax is due on your activity forthe year----------------------------------------And after reviewing your file, we detail hereunder the elements of taxassessment for the said year.SR15% profit on sales estimated at ()..............Legal exemption ()------------Profit subject to tax ()-----------Tax ()..............Paid on accountDateDue paymentTax calculation10,000x5%=20,000 x 10% =30,000 x 20% =Over 30.000 x 30%You are requested to pay the above amount' i. e. (SR) and we will be pleased toreceive your comments on the estimated value of sales, within one month fromreceipt of this notice so that we may be able to review your file in accordance withthe documents submitted. Rates of profits are not subject to review because theseare prescribed in accordance with paragraph 2 of Article4 of income taxregulations. It the Branch does not receive your comments on the value of saleswithin one month of this notice, it will be considered as the final assessment of taxto which will be added the delay penalty legally prescribed.Branch Director

Ministry of Finance & National Economy,Zakat & Income Tax DepartmentNo.Branch:Date:Notice on tax assessment imports and contracts.Mr ...............Reference is made to our notice on our estimation of taxable elements as perletterNo-------- dated-----------and pursuant to your comments in your letter dated-----and upon reviewing these comments,We hereby detail the assessed tax and the elements on which it is based:SR15% profit on imports totalling ( )------------10% profit on imports totalling ( )------------5% profit on imports totalling ( )------------Total imports ( )------------15% profits from other activities totalling ( )------------Total profits ---------------ExemptionTaxable incomeTax--------------------------Paid on account at -------------Tax due-------------+ Penalty at ------ % -------------Amount DueTax calculation10,000x5%=...........20,000 x 10% = ...........30,000x1 5%=...........Over 30.000 x 30% = ---If you disagree with the decision taken by the Branch, you may object to theassessment by written justified application to be sent by registered mail within 30days from the date of this notice to the Preliminary Objection Committee.Branch Director

Ministry of Finance & National Economy,Zakat & Income Tax Department No. --------Branch.......................................................Date:Notice on tax assessment on other than imports and contractsMr ..................Reference is made to our notice on our estimation of taxable elements as perletter No ----------dated------------andpursuant to your comments in your letterdated and upon reviewing these comments,We hereby detail the assessed tax and the elements on which it is basedSR5% Profits on sales estimated at ()Legal exemptionProfit subject to taxTax.Paid on accountDate.Tax duePenalty at %Amount due.Tax Calculation10,000 x s% = .........20,000 x 10% _ ...........30,000 x 20% _ ...........Over36,000 x 36%If you disagree with the decision taken by the Branch, you may object to theassessment by written justified application to be sent by registered mail within 30days from the date of this notice to the Preliminary Objection CommitteeBranch Director

Zakat and Income Tax DepartmentInternal SlipNo. of registration of attached transactiondate: -" Director General" Deputy Director" Director of Companies Accounts Department." Director of Oil Companies Accounts Department." Director of Auditing Department." Director of Budgeting and Planning Unit." Technical Experts." Director of Financial Affairs and personnel." Personnel Section." Inspection" Statistics" For initialing and return" For necessary action" For study and reporting" For filing" For discussion" For informationRemarksSignatureý4S41;.,ýýeýýi.n+pýrýi: ýCý ae