Q: If I loaned someone $20,000, who pays the Zakat on it?
A: If one loaned someone $20,000, the responsibility for Zakat remains with the lender (the one that gave the loan), since the money still belongs to them even though it is temporarily with the borrower. However, how Zakat is treated depends on the likelihood of repayment.
1: If the borrower acknowledges the debt and is reasonably expected to repay it and confirms the debt (or even makes payments, etc), this type of loan is considered a ‘Strong Debt (Dayn ul Qawī).’ Thus, the lender should include the $20,000 in their zakatable assets each year and pay 2.5% ($500) annually. The lender may either pay this Zakat each year or keep track of it and pay the accumulated amount once the loan is repaid.
2: If the debt becomes doubtful or weak (Maal al-Ḍimaar), meaning there is no reasonable expectation of repayment—such as when the borrower is bankrupt, denies the debt, cannot be located, or the lender has effectively lost hope of recovery—then Zakat is not required annually while the debt remains unrecoverable. If the money is eventually recovered in the future, Hanafi scholars state that Zakat is only paid for the year in which the money is recovered, rather than for all previous years.
Allah Certainly Knows Best.