Salaam guys just a quick question
Do we have to purify (give to charity) any profits we make on dividends or do we also have to purify profits made on capital gains when we make a profit on sharia compliant stocks
Assalaamu alaykum,
Purifying capital gains remains a debated issue. Some scholars argue that capital gains’ purification is not necessary, since the change in the stock price does not reflect the interest income, while others advocate capital gains purification.
Those who are in favor of capital gains purification argue that it is safe not to utilize or benefit from impure income that might be reflected in the capital gains. This is because, fundamentally, the market price capitalizes the company’s total earnings including those from Sharīʿah non-permissible earning. However, critics of capital gains purification argue that earnings from interest-based activities tend to be insignificant, and, therefore, their impact on capital gains is negligible.
The treatment of capital gains from the cleansing perspective remains under debate. Some scholars such as Sheikh Taqi Usmani suggest that it is a safe approach to cleanse capital gains from selling shares. It is based on the understanding that the market price might reflect an element of interest or impermissible income. On the contrary, ISRA-Bloomberg opines that there is no need to cleanse capital gains. It is argued that the change in the stock price does not directly reflect interest or other income generated from Sharīʿah non-compliant activities of a company. In reality, the changes in stock price in the market comprise a complex phenomenon that is attributed to multifarious factors, including supply and demand. Therefore, capital gain is not direct income from Sharīʿah non-compliant activities. Moreover, the stock price in the market basically reflects the price that the buyer is willing to pay to acquire those shares. It would be far from reality to think that the investors consider interest or impermissible income during trading shares as the principal factor or objective of the transaction, especially when it is in a negligible amount (less than 5 per cent of the total revenue in this case). This opinion is based on the Islamic legal maxim stating:
يغتفر في التابع ما لا يغتفر في المتبوع
Something can be forgiven as the subsidiary which cannot be forgiven as the principal (Al-Zuhayli, 2006, vol. 1, p. 447).
The above maxim proposes that when a factor or element is subsidiary to a principal factor or element, it might be overlooked in issuing the Sharīʿah ruling for the whole case, whereas that element cannot be overlooked otherwise. Putting it in the context of cleansing capital gains, it can be said that the interest or impermissible income is definitely a subsidiary factor. Therefore, it seems more appropriate to exclude capital gains from the income cleansing process.
Due to the differing interpretations of Islamic laws, Shariah scholars inevitably will have diverging views and thoughts about purification in investments. Some have the opinions that only impure dividends received from Shariah-compliant companies need purification, while others argue that capital gains from stocks ought to be purified as well.
Most scholars agree that non-permissible income, such as interests earned, would taint the overall distributed income of an Islamic fund if the dividends received from its underlying stocks aren’t purified. For that reason, many Islamic finance and investment experts do recommend that purification be carried out on dividends received by Shariah equity funds.
On the other hand, capital gain is a resultant of inherent price volatility of a stock due to varied market factors. And that is why some Islamic scholars think it is unnecessary to subject a market-induced element, like capital gain, to purification
Opposing Muslim academics, however, argue that while capital gains are the outcome of a myriad of market dynamics, these returns could also be attributed to circumstances related to cash and debt, including interest income. As such, capital gains should also be purified, they point out.
Ultimately, the Shariah supervisory boards of Islamic equity funds will be the ones ascertaining the type of income and capital gains that ought to be purified. Looking at the Templeton Shariah Global Equity Fund, for instance, its Shariah supervisory board mandated that purification be implemented on tainted dividends as well as net realized non-compliant profits for semi- annual period ended April 30, 2017.
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That’s great so what’s the maximum
Percent that needs to be purified if the stock is shariah compliant. Will it always be a maximum of 5 percent.
Subhanallah @Mufti_Faraz_Adam… What a beautiful detailed response.
May Allah increase your knowledge and status in duniya & aakhirah for the effort you are putting in helping the Ummah understand the nuances of Islamic finance.
@Mufti_Billal same dua for your efforts too.
Jazakallah
With Regards
Ahmed Haq
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Wa alaykum salaam,
Ameen and jazakallah khayran for your kind duas.
Detailed response but no real direction. If we go with. Income purification on capital gains. What is the determining factor of what percent gets purified? Say I buy and sale a stock in a minute. From one dollar and sale for two dollar. That dollar profit is purified how? From a quarterly report of 2 months ago that interest income is 2 percent of companies total revenue. What is the formula to determine how much percent needs purified and where are those numbers taken from. Allahu Alim
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Subject of Purification
Capital gains are not subject to purification of companies whose primary business activity is Halal. Only impermissible revenue is to be purified by a shareholder.
Purification formula
Purification amount = Dividend Received* x Purification Rate**
*Dividend Received = Dividend Per Share x No of Shares
**Purification rate = Impermissible Revenue / Total Revenue
Purification Process:
- Calculating the amount of income earned from any non-Shariah compliant or unacceptable business activities by investee companies in which a shareholder is invested.
- Dividing the amount of non-permissible income upon the number of shares of the investee company to obtain the non-permissible income per share.
- Multiplying the non-permissible income per share into the number of shares invested in to obtain the total non-permissible income.
The Basis
The AAOIFI Sharia Standard No.21 states:
“The figure, whose elimination is obligatory on the person dealing in shares, is arrived at by dividing the total prohibited income of the corporation whose shares are traded by the number of shares of the corporation, thus, the figure specific to each share is obtained. Thereafter the result is multiplied by the number of shares owned by the dealer – individual, institution, fund or another – and the result is what is to be eliminated as an obligation.”
@Mufti_Faraz_Adam Salam Alaikum,
Hope your doing well.
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If a company’s primary business activity is halal but they have a secondary business activity which goes over the 5% mark of impermissible income, should the capital gains be purified or no?
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Also, if a company’s business activity is halal but they failed the shariah financial screening, would the capital gains be purified in this case or no because the primary business activity is halal?
Please do let me know Mufti, only then I won’t be confused anymore regarding this matter.
JazakAllah Khayr.