Why is Zakat Obligatory on Paper Money?

Zakat, one of the Five Pillars of Islam, has always been a key element of Islamic finance. 

It’s an obligatory charity that aims to redistribute wealth and support the community, particularly those in need. Originally, during the time of Prophet Muhammad (peace be upon him), Zakat was due on gold dinars and silver dirhams. 

Here’s a breakdown of why Zakat applies to paper money:

• Historical Context:
• In the time of Prophet Muhammad (PBUH), Zakat was due to wealth held in the form of gold and silver coins (dinars and dirhams).
• Modern-Day Currency:
• Today, we use paper money as the primary medium of exchange and store of value. Paper money, like gold and silver, serves as a tool for trade and wealth storage.
• Nature of Paper Money:
• Although paper money is not physically backed by gold or silver, it still holds value. Its worth is derived from its purchasing power, which is in line with the concept of wealth in Islam.
• Zakat on Cash and Assets:
• Zakat is due on wealth, including cash, that has growth potential or is used for trading purposes. Since paper money forms part of an individual's total wealth, it is subject to Zakat just like gold and silver were in the past.
• Principles of Zakat:
• Zakat applies to wealth, not just specific materials. The core principle is the circulation of wealth to benefit the needy, and paper money fits this purpose.

Note: Paper money, like coins, is a physical form of currency used for transactions and considered cash. It is often kept as savings. The due date for Zakat on gold, silver, and cash savings is the same.

Thus, even though paper money has replaced gold and silver in today’s financial system, it still fulfills the same role in terms of wealth. Therefore, Zakat is due on paper money as part of the wealth an individual possesses.

And Allah knows best!

 Other Zakat Questions You May Have

• Does Earned Interest Affect Missed Zakat Payments?
• Is Money Saved for Buying a House Liable for Zakat?
• Are Gift Cards with Cash Balances Subject to Zakat?
• Is Zakat Required on Money Stored in a Bank Account?
• Should Zakat be Paid on Contest Winnings Not Yet Received?
• How is Zakat Applied to Inherited Cash?