Purification of Money

So, you’ve decided to take the plunge and open an investment account. Congratulations! You’ve taken a step that not a lot of people decide to take – being financially free, one day, Inshallah. However, as a Muslim investor, you need to take a few things into consideration: compliance of investments from a Shariah point of view, ethical dilemmas, and purification of impermissible revenues.

For the sake of keeping on topic, let’s discuss purification and its importance to you as a Muslim investor who wants to keep it Halal. You might be asking yourself…

What is purification, and why do I need to do it?

In short, and since we’re living here in Canada, many investments have some impermissible aspects to them; whether it’s interest derived from cash sitting in a bank or a form of revenue that’s derived from impermissible or questionable streams. You might be asking yourself “Why to invest in something if there’s Haram in it?” This is a question scholars have answered in the form of screening criteria for what makes it permissible to invest in a stock/ETF with exposure to some Haram. In order to keep your gains Halal, you must purify the impermissible amounts. 

Abu Huraira reported: The Messenger of Allah, peace and blessings be upon him, said,

“A time will come upon people in which they will consume usury.” It was said, “All of the people?” The Prophet PBUH said, “Whoever does not consume it will be affected by its dust.” Source: Musnad Ahmad 10191

Along with your typical due diligence before investing into any stock, ETF, or Shariah screened fund, you must determine how much Haram it is exposed to. This exposure will give you the percentage of which to purify your gains and dividends, it’s known as the purification ratio. If you are having trouble determining how much it will be, and what to pay it on, there’s a simple way to be safe: purify the maximum amount.

There is a difference in opinion regarding the purification of asset gains on individual stocks, since the asset growth may not be entirely related to the appreciation of a particular equity. However, dividends (rewards to shareholders as a direct result of revenue) must be purified. As per AAOIFI guidelines, the maximum amount of Haram revenue allowed in order to invest in an individual stock should not exceed 5% of its overall revenue. Therefore, it’s safe to say that 5% of all dividends received on such investments should be donated if you’re not able to determine the exact number yourself. Typically, you would do this either quarterly or annually, to someone in need (not a Masjid since the funds are impure). You would do the same for an ETF with impermissible holdings, purify any gains you receive on the ETF as well as any impermissible weight of the fund once you sell.

The importance of this act of purification is to bring back full circle that we are investing in a Halal manner, and as we do with all of our actions, it is to please Allah in the end. Keep Allah in mind in all your actions, and don’t take the act of purification lightly, as it is a necessity being a Muslim investor in today’s world. Be the light and shine it bright!

If you’re looking for a Halal ETF to invest in, check out Manzil’s Halal Portfolios which include Wahed’s HALAL ETF.

Always do your research, and Allah knows best.

Salaaaaaaaaaaaaaaaaaaaaaam!

If you enjoyed this article, check out brother Nader Tohamy on Instagram and TikTok on @halalstocktok.