Purification Donation

Salam,

According to AAOIFI standard, the haram elements of revenue of a public company should be less than 5%. Now if a company has 6% haram income, according to AAOIFI, do we donate 1% (which is the amount higher than 5%) or the whole 6%?

Wasalam

May Allah bless you.
The 5% haram revenue is a tolerance benchmark to determine, if a company is overall shariah compliant or not. However, it does not mean that we can profit from the haram element. Even if the revenue was just 1% then we would still have to give that 1% away.
Thus, in the scenario you mentioned, it is the full 6% that must be given away.

However, please note that once the haram revenue goes beyound 5%, you would have to exit the investment as well. This is due to the fact that, now the company is not considered shariah compliant anymore.

And Allah knows best!

Assalaamu alaykum,

If a company has 6% impure income, it becomes Shariah non-compliant and it is not permissible to invest in the company altogether. You would need to exit the investment.

Upto 5% you can invest and purify, above 5% and the entire investment is now not compliant as it fails the screening criteria.

Allah knows best

Assalamu aleykum wa rahmatullah wa barakatuh !
Please, can you explain why 5% of haram income from a company would be ok? And when you talk about purifying, is it that when you earn a benefit from such a company you should take away 5% of this revenue and consider it haram?
Jazakallahu khayran !

Good question, I wondered the same myself. There is an in-depth article by IFG here already:

The section on purification is as follows:

'Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners ‚Äúinter se.‚ÄĚ All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as ‚Äúpurification.‚ÄĚ

The Shariah scholars have different views about whether the ‚Äúpurification‚ÄĚ is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of ‚Äúpurification‚ÄĚ is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only.

Although this second view is not without force, yet the first view is more cautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price compared to the first person.

On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.’

So it seems that the most cautious approach is to purify both the dividends (if the company pays dividends to its share holders) and to purify the profit made. This may be 5%, but it may be less than 5%, so it depends on the percentage of the company‚Äôs haram income. This can be found by looking at the company‚Äôs annual reports and reviewing the ‚Äėfinancial income‚Äô as a percentage of the total income.

The scholars on this forum may expand on this further, I hope this helps.

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It helped Jazakallahu khayr!