Dr. Monzer Kahf, a prominent Muslim economist and counselor, states that: “Zakah on stocks is not the same as Zakah on mutual funds. Stocks represent shares in the ownership of a company that deals in certain business, producing certain goods or services, or trading the same.
Mutual funds are a special form of partnership established exclusively to deal in financial markets, mostly buying and selling stocks, future commodities and/or sharing a money market account. Buying units of a stock-trading mutual fund – and we assume that all stocks it deals with are within the limits of Shariah, i.e., we exclude funds that deal with stocks that do not fulfill the criteria set by contemporary Fuqahaa’ (scholars) of stocks that a Muslim may trade/own – is itself setting these savings (money) as principal in this partnership. By this very act you become a merchant or trader in stocks from the Shariah point of view. And a merchant is subject to Zakah if other conditions of Zakah (unconditional ownership, Hawl (passing of a lunar year), Nisab (payable amount), excess above debts and basic consumption needs) are satisfied.Whether the source of this principal in the mutual fund partnership is savings, inheritance, gift, etc., is immaterial to the Zakatability. Zakah rate is 2.5% of the net asset value on the due date.
Stocks that which are permissible to buy and own may be purchased for either holding them and expecting their dividends or for participating in the management of the company, or for using them as tradable objects waiting for a good opportunity to realize a capital gain and sell. In the latter case you are called in Shariah merchant or trader, regardless of the English jargon of “investor,” and you are to pay Zakah as in the case of mutual funds at the same rate and net asset value on the due date of
Holding stocks for their dividend is usually done on a long term vision, during which capital gains may also be realized but the owner usually keeps holding them for long period. There are three views on the Zakah in this case:
a. The view of the majority, which came in a resolution of the OIC Fiqh Academy, maintains that one has to calculate the Zakatable part of the value of the stock, from the company’s balance sheet and pay Zakah on it in the due date at the rate of 2.5%. The Zakatable part is: cash+receivables+inventories of goods in process and ready for sale-short term debts.
b. The minority view, which I personally subscribe to it in the case where the owner is only investing in these stocks even for long term but without any interest in the management and little concern about dividends, states that this investment is similar to trading in stocks, in the Shariah meaning of the word. Accordingly, the owner has to pay Zakah at the rate of 2.5% on the market value on the due date.
c. The third view is a subset of the first one; it actually adds to the first one that if it is difficult to calculate Zakah from the balance sheet, one may pay 10% on the net income of the stock, in analogy with agriculture. I personally do not see any logical support in Shariah for this opinion.