FRAMEWORK FOR ZAKAT ON INCOME OF ISLAMIC FINANCIAL INSTITUTIONS: A JURISPRUDENTIAL ANALYSIS OF RETAINED EARNINGS AND JOINT WEALTH

Abstract

This article develops a Shari'ah-based framework for determining Zakat on the income of Islamic financial institutions, with particular attention to retained earnings, investment assets and the juristic doctrine of joint wealth (khultah). It argues that the Zakat treatment of Islamic banks cannot be resolved merely by classifying them as modern corporations; rather, the inquiry must identify the legal character of the income, the ownership relationship between the institution and shareholders, the nature of the assets in which the income is held, and the authority under which the institution pays Zakat on behalf of those liable. The article adopts a doctrinal and analytical method, relying on the Qur'an, Sunnah, classical fiqh, contemporary juristic resolutions and Islamic finance governance standards. It finds that Zakat is due only where the conditions of Zakat are satisfied, including Islam, nisab, full ownership, growth, hawl and lawful source of income. It further finds that retained earnings of Islamic banks may be treated through the principle of khulṭah, especially where the bank pays Zakat under its constitutional documents, a shareholders' mandate, law or regulatory requirement. The article recommends that Islamic financial institutions adopt a transparent Zakat policy, distinguish zakatable from non-zakatable assets, exclude non-liable shareholders' portions, cleanse prohibited income rather than treat it as zakatable profit, and disclose the basis of computation in audited financial reports.