Source: BURSA MALAYSIA | Published: October 2023
Prepared by Shariah Centre of Excellence
Purification in Islamic finance is the process of cleansing an investment of any unintentional Shariah non-compliant income. This is an essential element of halal investments, as it ensures that investors are not profiting from activities that are considered prohibited in Islam.
The purification process is particularly relevant in the context of investment funds or portfolios that may inadvertently acquire some non-compliant income through dividends, interest, or other sources. To ensure the investments remain Shariah-compliant, investors and fund managers undertake a purification process that involves identifying and calculating the Shariah non-compliant portion of the income and then donating that portion to charitable causes or community development projects.
This process helps to cleanse the investment from any impermissible earnings, ensuring that the remaining income is in line with Shariah principles. The investors are prohibited to use this Shariah non-compliant funds for their benefit either by using the funds for any tax benefit or for zakat obligation.
Method of Purification
Shariah Advisory Council of Securities Commission (SAC SC) advises investors who invest based on Shariah principles to dispose of any Shariah non-compliant securities which they presently hold, within a month of knowing the status of the securities. Any gain made in the form of capital gain or dividend received before or after the disposal of the securities has to be channelled to baitulmal and/or charitable bodies. The investor has a right to retain only the investment cost.
The SAC SC didn’t have a specific method for purification. However, we can refer to the guidance from the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) as follows:
- Identify the total number of common shares of the company.
- Divide the total prohibited income by the total number of shares issued to get non-compliant dividend per share.
- Multiply these by the total number of shares owned by the investor.
- This final amount should be reduced from the dividends.
Benefit of Purification
Purification is an important part of Islamic finance, as it helps to ensure that investors are not profiting from prohibited activities. By understanding the different methods of purification, investors can make informed decisions about how to manage their Shariah-compliant investments.
Here are some of the benefits of purifying Shariah-compliant equities:
- It ensures that your investments remain in line with Shariah requirements. This can give you peace of mind and help you to avoid any potential financial or legal problems.
- It can help to improve the overall performance of your investment portfolio. This is because purification can help to reduce the risk of your investments being exposed to non-compliant income.
- It can help to promote social justice. By donating non-compliant income to charity, you can help to support those in need and make a positive impact on the world.
Tags: Shariah Equities
