We often try to minimize the amount we pay in taxes on our investments, but halal investing requires another type of “tax” in order to make sure you’re not unintentionally benefitting from haram earnings. We’re talking here about purification. And unlike taxes, it’s something many people are happy to give away.
Criteria set forth by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) say a company you invest in cannot earn greater than 5% from impermissible sources–for example, pork or alcohol. Additionally, investors must purify their portfolios annually of any impermissible earnings for amounts less than 5%. We figure out the purification amounts using financial data from vendors that specialize in this reporting. Clients in the Azzad Ethical Wrap Program receive purification calculations as part of their service. Azzad Funds shareholders can use the purification calculator on our website to purify investments themselves.
Don’t confuse purification with zakah, by the way. Investors should not pay zakah on haram earnings, so purification is calculated first (and ideally given away). Only then is the zakah calculation made.
Many folks still don’t understand or know this is a requirement. Moreover, some companies may use different purification models, which makes it even more confusing. Their method results in artificially low amounts because they purify only dividends. But AAOIFI recommends purifying investments at the earnings level if at all possible. Talk with your Azzad advisor for more information about this important part of halal investing.
