DEFINITION of 'Zakat'

Zakat is a term used in Islamic finance to refer to the obligation that an individual has to donate a certain proportion of wealth each year to charitable causes. Zakat is a mandatory process for Muslims in order to physically and spiritually purify their yearly earnings that are over and above what is required to provide the essential needs of a person or family.

BREAKING DOWN 'Zakat'

There are comprehensive descriptions in religious texts describing minimum amounts of zakat with regards to farm produce, cattle, business activities, paper currency and precious metals such as gold and silver.

The most common level of zakat on wealth from cash, equities and gold is 2.5% of the total value.

As one of the Five Pillars of Islam, zakat is a religious obligation for all Muslims who meet the necessary criteria of wealth. It is not a charitable contribution and is considered to be a tax or obligatory alms. The payment and disputes on zakat have played a major role in the history of Islam, notably during the Ridda wars.

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