Zakah and Purification
For some investors, zakah and purification are an essential part of the investment process.
Zakah is the financial obligation every Muslim must pay on surplus wealth above a certain amount (nisab) that they’ve owned for at least a year.
Azzad calculates zakah every year on investment and retirement accounts that are owned by its clients for 12 lunar months. Calculations are usually performed a week before the month of Ramadan.
Calculating Zakah on Modern Financial Assets
Zakah and Purification Calculations
Azzad’s zakah accounting software calculates zakah by considering the following:
- Whether the investments held in the accounts are for the purpose of trade or deriving an income.
- Whether the accounts are tax-deferred, taxable or non-taxable.
- The amount of taxes and penalties, if any, that would become due if the accounts were to be liquidated and distributed to investors.
Azzad provides the calculation figures so clients can disburse the correct minimum zakah amount to their favorite charities or recipients themselves.
Zakah is not required to be paid from the account on which it was assessed; clients can make donations from any checking, saving, or investment account they choose.
Clients bear all liabilities for any taxes and/or penalties that may incur when they withdraw money from their accounts. Azzad does not provide tax advice, so clients should consult with their tax advisor regarding any tax consequences that may result from liquidation or distribution.
Purification is the cleansing process which requires that any investment income that might have been generated from unlawful activities according to Shari’ah-based investing principles be given to charity.
Although Azzad follows strict Shari’ah-based guidelines when investing, we advise our clients to cleanse any non-permitted income (such as interest) that might have been earned by the investment companies in the portfolio. Azzad accounts purification and accrues it daily on our clients’ investment and retirement accounts. Purification amounts are usually accrued for the 12 months prior to a week before the month of Ramadan.
Azzad purification accounting software calculates the purification for each security considering:
- The number of shares
- The net income per share
- The number of days held
As with zakah totals, Azzad provides only the calculation figures for purification. Clients directly disburse the amount of annual purification to their favorite charities or recipients out of whichever accounts they choose.
Purification is not required to be paid from the exact account that the purification is assessed.
Clients bear all liabilities for any taxes and/or penalties that may incur when they withdraw money from their accounts. Azzad does not provide tax advice, so clients should consult with their tax adviser regarding any tax consequences that may result from liquidation or distribution.
- Riba, which is often translated as interest or usury. Basically it refers to an increase in capital without any real services provided. Riba is prohibited on both sides of the transaction – paying as well as receiving interest
- Gharar, which means risk, or any financial transaction or contract (such as insurance) which includes an element of chance
- Investing in forbidden (haram) businesses or industries. Examples include companies which derive significant income (defined as more than 5% of their total income) from the processing or sale of alcohol, tobacco or pork. Other prohibited industries are defense/weapons, gambling, pornography and financial firms that charge or pay interest
- debt-to-market capitalization ratio of more than 30%
- Accounts receivable ratio of more than 45%
- An additional requirement is to engage scholars who have knowledge of finance to certify initial compliance as well as ensure ongoing compliance.