How to calculate purification for a halal stock

A stock passed halal screening, so it must be completely clean — that's the natural assumption. In practice, though, almost every company keeps part of its cash in the bank and earns interest on it. Small as it is, that income is riba.

The AAOIFI standard permits investing in such a company as long as non-permissible income stays under 5% of total revenue — with one condition: you work out your share of that impermissible part and give it to charity. This is called purification (Arabic tathir).

The formula

Two steps:

1. Purification ratio = the company's interest (non-permissible) income ÷ its total annual revenue
2. Amount to donate = the dividend you received × the purification ratio

You don't need to compute step one yourself — every stock page shows the ratio ("Non-compliant income / total revenue"), together with the filing it comes from.

Example

Say you own shares of company "A":

• annual revenue — $10 billion;
• interest earned on its cash — $150 million;
• so the purification ratio is 150 ÷ 10,000 = 1.5%.

Over the year you received $400 in dividends. The amount to donate:

$400 × 1.5% = $6

The remaining $394 is yours.

The ratio is refreshed every quarter: with each new filing both interest income and total revenue change. Use the ratio in effect when the dividend was paid.

What about stocks that pay no dividend?

Many growth companies (especially in tech) don't pay dividends at all. Scholars differ on what to do here:

• some say purification applies only to dividends actually received;
• others recommend 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. Ask your own scholar which to follow.

Important notes

• Purification is not zakat. This money was never yours, so it can't be counted towards zakat and isn't given in expectation of reward — it is simply returned to its rightful owners, those in need.
• If the ratio exceeds 5%, purification doesn't fix it. Such a stock fails screening and won't be on the halal list.
• If the filing is stale, the stock becomes "undetermined" — the ratio can't be computed reliably. More: Why does a stock's halal status change?

Where to start

1. Open a company from your portfolio in the halal stocks list.
2. Note the percentage in the "Non-compliant income / total revenue" row.
3. Multiply your dividends for the year by that percentage.
4. Give the result to charity — ideally as soon as the dividend arrives, without putting it off.

Full details on how screening works: methodology.

This article is for information only and is not a fatwa. Consult your own scholar for a final religious ruling. Not investment advice either.