Purification and zakat

Why purify

Even a stock that passes the screen is not entirely "clean". Almost every company earns a little interest on its cash, and some have a small amount of prohibited sales. AAOIFI permits investing in such a company — as long as impermissible income stays below 5% of total revenue — on one condition: you separate out your share of that impermissible income and give it to those in need. This is called purification.

The logic is simple: this money was never yours. You are not "donating" it; you are returning it to its rightful owners. That is why many scholars say it should be given as discharging an obligation rather than in hope of reward.

What counts as impermissible income

These items in a company's filings are subject to purification:

• interest earned on cash and bonds;
• small amounts of prohibited sales — alcohol in a supermarket, for example;
• other interest-based income (for example, from interest-bearing credit extended to customers).

Profit from the company's core, halal business is not purified. Only the impermissible share is.

The main method: from dividends

Two steps:

1. Purification ratio = the company's impermissible income ÷ its total revenue.
2. Charity amount = the dividend you received × the purification ratio.

Example. A company's annual revenue is $10bn, of which $150M is interest. The purification ratio: 150 ÷ 10,000 = 1.5%. You hold 100 shares and the company paid $4 per share in dividends over the year — $400 in total.

Charity: $400 × 1.5% = $6. The remaining $394 is yours. The yellow slice on the chart is tiny — but it is exactly what makes the dividend clean.

With several stocks

Each stock has its own ratio, so each is calculated separately:

• A: $400 dividend × 1.5% = $6.00;
• B: $250 dividend × 0.8% = $2.00;
• C: $120 dividend × 3% = $3.60;
• total: $11.60.

Applying one "average" percentage to all dividends gives the wrong answer — if a large dividend came from a stock with a high ratio, you would give too little.

Which period's ratio to use

The ratio changes every quarter with each new report. A practical rule: use the most recent ratio at the time the dividend was paid. Log your dividends through the year and apply the ratio in force at each payment.

Purifying capital gains

Many growth companies pay no dividend — the investor earns only from the price rising. Scholars differ here:

• some say purification applies only to dividends actually received;
• others recommend also purifying the same share of the profit when you sell — because the share price reflects all of the company's income, interest included.

The cautious path is the second. Example: you bought 50 shares at $80 ($4,000) and sold them at $100 ($5,000). The gain is $1,000 and the company's impermissible share is 2%.