Zakat and the Subtraction of Loans

Zakat is obligatory (fard) on certain types of wealth, which are:

1) Gold & Silver

2) Cash

3) Merchandise (i.e. items for resale)

4) Agricultural products

5) Animals & livestock

When one adds all these Zakatable assets as one amount, one must see how much he/she owes to other people, and then subtract this amount from the total. Zakat will be paid from whatever remains after subtraction, if it reaches the value of Nisab (Zakat payable amount), at the rate of 2.5 %.

This has more or less been mentioned in the major Hanafi Fiqh references. See, for example: Radd al-Muhtar 2/260, al-Hidaya 1/186 & others.

The Fuqaha have explained these debts as that which is demanded and claimed by other people. Whether it is the right of Allah, e.g. Zakat demanded by the Imam, or the right of the servants of Allah, such as: debts, dowry, etc.

The reason behind debts preventing the obligation of Zakat is (as the Fuqaha explain), that one of the conditions for the obligation of Zakat is that the wealth be in excess of ones personal needs. When one has debts that need to be paid off, the Zakatable assets will not be in excess of his personal needs, as he needs to pay all or some part of this wealth to the creditors.

However, a very important point with regards to loans has been mentioned by the great jurist and scholar of the modern era, Shaykh Mufti Taqi Usmani (Deputy Chairman of the International Islamic Fiqh Academy, Jeddah). He (may Allah preserve him) says that there are two types of loans:

a) Normal loans that are taken for personal and basic needs. These will be subtracted from the total.

b) Loans taken by major capitalists and businessmen for the purpose of production, business and importing.

If a loan of this type is subtracted or deducted from the total, then not only will Zakat not be Fard on these capitalists, rather they will become eligible to receive Zakat. The reason being, that they have taken loans from the bank that is more in value than their possessions. Therefore, there is a different ruling regarding the subtraction of loans of this kind.

The ruling is that, if a person takes a loan for a business purpose and with this loan he purchases Zakatable goods (items on which Zakat is Fard) i.e. raw material, business goods, etc, then this loan will be subtracted. However, if he purchases non-Zakatable items, i.e. machinery, building, etc, then it will not be subtracted.

The reason for this is that, when he purchases items on which Zakat is Fard, it will already be included in his Zakatable assets, thus the loan will be subtracted. But if he purchased non-Zakatable items, they will not be included in his Zakatable assets, and thus he will have to include it in the total (Fiqhi Maqalaat, Vol.3, and P.155).

For more details regarding the issues relating to Zakat, please refer to my booklet titled Simplified Rules of Zakat (A Hanafi Perspective) which has been published and is available in the UK.

And Allah Knows Best