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The world of finance is constantly evolving, but for Muslim investors, certain principles remain steadfast, such as Zakat.
وََأََقَِيمُُوا الصَّ� ّ لَ َاةََ وََآتُ ُوا الزَّ� ّكََاةََ وََأََقَْرِْضًُوا اللَّ� ّهَ َ قَ َرْْضًًا حََسَِنً ًا ۚ وََمَُا تُ ُقََدِّ�ّمُُوا لِِأََنفُُسِِكُُم مُ�ّنْْ خََيْْرًٍ تََجِِدُِّوهُُ عِْنًدَِّ اللَّ� ّهَِ هُُوَ خََيْْرًًا وََأََعْْظََمََ أََجْْرًًا
“And establish prayer and give Zakat and loan Allah a goodly loan. And whatever good you put forward for yourselves—you will find it with Allah. It is better and greater in reward.”
Surah Al-Muzzammil [73:20]
Navigating Zakat in the context of modern finance can be complex. As financial systems grow more intricate, so too do the questions surrounding how to apply this important form of almsgiving. At Vennre, we are committed to providing clarity and guidance, helping investors understand their obligations with confidence.
Zakat, a foundational pillar of Islamic financial jurisprudence, mandates that eligible Muslims annually allocate approx.2.5% of their qualifying wealth for redistribution to those in need. While the principles governing traditional asset classes such as cash, gold, and business capital are relatively straightforward, private market investments introduce additional layers of complexity due to their illiquidity, valuation challenges, and structural intricacies.This article delves into the intricacies of zakat treatment in private market investments and explores the different methodologies for calculating zakat based on the type of strategy and asset involved in accordance with the Hanafi school. Bythe conclusion of the paper, readers will have a robust framework for executing precise Zakat calculations while maintaining compliance with Islamic financial principles.In doing so, we want to help to demystifyZakat, helping investors worldwide gain a clearer understanding of its requirements.Our goal is to empower your wealth journey—fostering financial independence while ensuring alignment with Islamic financial principles.
Zakat serves as both an economic equaliser and a religious obligation, ensuring wealth circulation and social welfare.
The jurisprudence governing Zakat is structured around specific principles that dictate its applicability, calculation, and distribution. It’s an essential part of the Islamic faith, but one that often causes uncertainty among Muslims particularly within the context of modern and evolving finance. To start, let’s explore the key principles of Zakat and how they may apply to your financial situation.
This refers to the minimum threshold of wealth a Muslim must possess before being obligated to pay Zakat. Traditionally, it is calculated based on the value of 85 grams of pure gold or 595 grams of pure silver. Some scholars use slightly different measurements, citing 87.48 grams of gold or 612.36 grams of silver. As different countries apply either the gold or silver Nisab, it is advisable to consult local scholars to determine the appropriate standard to follow.
This refers to the completion of a full year after a person’s wealth has reached the Nisab threshold, at which point Zakat becomes due. If Zakat is calculated based on the lunar year (354 days), the applicable rate is 2.5%. However, if using the solar year for cash and commercial assets, the rate adjusts to 2.577%. In a leap year (366 days), the rate slightly increases to 2.5775%. For agricultural produce, Zakat is due at the time of harvest, regardless of the Hawl. Similarly, for minerals and Rikaz (buried treasure), Zakat is payable upon extraction.
Assets subject to Zakat include cash holdings, financial investments, commercial goods, and business assets. Personal assets such as primary residences, personal vehicles, and consumable items remain exempt.
• Zakat is distributed to specified categories of recipients, including the poor, the needy, those in debt, and other qualified individuals in accordance with Islamic jurisprudence.
• Zakat may be paid in cash or in-kind, depending on the nature of the asset and its valuation at the time of disbursement.
• Zakat is applicable to wealth owned outright by an individual or entity. If wealth is shared or managed collectively, the distribution of Zakat must reflect the proportional ownership structure.
It plays a crucial role in fostering both individual and communal prosperity. As a form of human capital investment, Zakat empowers individuals by providing financial support to those in need, helping them break free from the cycle of poverty. It also injects liquidity into the market, stimulating economic activity by encouraging consumer spending.
Private market investments provide opportunities beyond traditional public markets, offering access to asset classes that enhance portfolio diversification and generate long-term value. These investments typically include private companies, real estate, infrastructure, and alternative assets, each with its own distinct characteristics and financial structures. Given the unique nature of these assets, understanding their treatment for Zakat purposes is essential.
Private Equity
• Investments in private companies, often through direct equity or equity-like securities.
Private Debt
• Non-publicly traded debt instruments issued by private entities.
Venture Capital
• Investments in companies, such as high-growth startups.
Infrastructure
• Investments in essential physical assets such as transport, utilities, and telecommunications.
Private Equity Real Estate
• Direct property investments or participation through funds and co- investments.
Commodities
• Precious metals, held either in physical form or through financial instruments.
Private Real Estate Credit
• Investments in real estate debt instruments, such as mortgages or property loans.
Alternatives
• Investments in non-traditional assets, such as fine art, watches, and luxury goods.
The Zakat base is calculated using the net assets method, as follows:
Zakat Base = Zakatable Assets
Less
• Liabilities Payable During the Financial Year as of the Balance Sheet Date
Add
• Instalments of Liabilities Due in the Coming Financial Period
• Rights of Non-Restricted Investment Account Holders
• Minority Rights
• Sovereign Rights
• Waqf Rights
• Charitable Rights
• Rights of Non-Profit-
• Earning Organisations with No Specific Owner
The following section outlines how different private market investments are treated for Zakat purposes, helping investors determine their obligations with clarity and confidence.
Zakat Base
• Investors must pay Zakat on the net Zakatable assets of the business, including inventory, receivables, and cash.
Valuation
• Zakat calculations may be based on the latest funding round, financial statements, or a conservative estimate of market value. For investments in private equity or venture capital funds, Zakat is calculated on the investor’s share of the fund’s Net Asset Value (NAV).
Debt Instruments
• Zakat is due on theoutstanding principal and profit from realestate debt investments.
Interest Income
• If interest incomeis earned from Sharia compliant realestate, it must be purified by donatingit to charity, as interest (Riba) isimpermissible. No Zakat is due on theinterest itself.
Debt Instruments
• Zakat is due on the outstanding principal and profit from real estate debt investments.
Interest Income
• If interest income is earned from Sharia compliant real estate, it must be purified by donating it to charity, as interest (Riba) is impermissible. No Zakat is due on the interest itself.
Private Debt
• Receivables: Outstanding loans and receivables are Zakatable if they arise from sales, lending, or Sharia compliant debt financing.
Infrastructure
• Revenue-Generating Assets: Zakat is due on income generated from infrastructure projects, such as toll roads, utilities, and telecommunications.
Commodities
• Physical Holdings: Zakat is due on the market value of gold and silver holdings, including bullion and coins.
Jewellery
• According to the Hanafi school, Zakat is due on all gold and silver, including personal jewellery. Other schools, such as the Hanbali school, exempt personal jewellery from Zakat, provided it is within reasonable limits and not intended as an investment.
Financial Instruments
• Investments in gold and silver ETFs or other financial products are Zakatable based on current market value.
Alternative Assets
• Zakat Base: Zakat is due on the market value of these assets if held for resale. If kept for personal use, they are not Zakatable.
Valuation
• The valuation of art, watches, purses, and other collectibles can be complex due to their unique and subjective nature. Professional appraisals may be required, or an estimate of current market value can be used.
For each Sharia-compliant investment, zakat is calculated in accordance with Islamic principles. Below is an illustrative example of how zakat liability is determined for an investor participating in a deal based on the net assets method:
The firm’s assets include:
2024
(USD)
Assets
Cash & Cash Equivalents 500,000
Other Financial Assets 30,000
Receivables 10,000
Total Zakatable Assets 540,000
Liabilities
Trade Payables 12,000
Other Liabilities 3,000
Total Deductable Liabilities 15,000
Zakat Base 525,000
Zakat Rate 0.025775
Zakat Payable 13,531.88
This example demonstrates the need to
carefully evaluate the breakdown of assets
within an investment when calculating Zakat.
Successfully managing Zakat compliance in private market investments isn’t just about fulfilling an obligation—it’s about ensuring your wealth aligns with your values while maintaining financial discipline. With the right approach, investors can meet their religious commitments confidently and efficiently.
Deductible Liabilities
• Certain liabilities can be deducted before calculating Zakat, reducing the overall obligation.
Lunar Year Basis
• Zakat is calculated annually based on the Islamic lunar calendar, so accurate tracking of financial holdings over time is crucial.
To ensure compliance, investors should take a structured approach to Zakat calculations, ensuring that their financial strategy remains both compliant and effective.
A strategic approach to this challenge will include:
• Consulting with Islamic finance experts to stay aligned with the latest interpretations of Zakat regulations.
• Applying a clear methodology to identify Zakatable assets, deduct liabilities, and calculate the due amount based on the correct timeframe.
Calculating Zakat on private market investments requires careful consideration of the type of investment, ownership status, and market conditions. By understanding the principles and methodologies outlined above, Muslim investors can fulfil their Zakat obligations accurately and conscientiously, ensuring compliance with Islamic teachings while contributing to social welfare. Due to the complex nature of Zakat calculation based on the nature and type of each investment, Vennre, in collaboration with the Shariyah Review Bureau, will be issuing a Zakat opinion for each deal provided on the platform.
This white paper has been prepared in close collaboration with our esteemed partner Shariyah Review Bureau (SRB), serving as our dedicated Sharia advisor. Their expert guidance and rigorous review have been instrumental in ensuring that all strategies and recommendations within this document align with the highest standards of Sharia compliance. We are grateful for their invaluable contributions, which reinforce our commitment to maintaining the integrity and ethical foundations of Islamic financial practices.
