We work with financial institutions providing research and resolutions on conflicting views that may exist between management and the respective Sharia Boards. Such conflicting views can exist on product structures, fund mechanisms, fiqh qualification, non-compliance risks, and other services.
Zakat is one of the Five Pillars of Islam and involves giving a portion of wealth (usually 2.5%) to those in need, serving as a means of social welfare and purification of one’s wealth. It is obligatory for eligible Muslims who possess wealth above a certain threshold (nisab) to give the Zakat amount to specific categories of people in the community, such as the poor, needy, and indebted individuals.
It is from the mercy of Allah that Zakat is not due on everything. Zakat for private market investments differs from that of stock market or money market investments. Calculating Zakat for investment firms poses unique challenges due to the complexity and diversity of modern financial instruments. Investment firms manage a wide range of assets, including equities, real estate, and alternative investments. Each asset class has different liquidity profiles, market valuations, and income generation characteristics, all of which affect the Zakat calculation. For example, equities may require the assessment of their market value and dividend income, while real estate investments involve determining property values and rental income. Additionally, valuing illiquid assets like private equity can be subjective and vary significantly, leading to potential discrepancies.
Another significant challenge is the dynamic nature of investment portfolios. Investment firms frequently adjust their portfolios to optimize returns and manage risks, resulting in fluctuating asset values and income streams. This necessitates continuous monitoring and regular recalibration of Zakat obligations, which can be administratively burdensome. Furthermore, the global operations of many investment firms add complexity, as they must navigate various regulatory environments and accounting standards while ensuring compliance with Sharia law. Integrating conventional financial reporting with Islamic finance principles requires sophisticated expertise, underscoring the importance of professional guidance in accurately calculating and purifying Zakat for investment firms. By understanding the principles and methodologies under each, investors can fulfil their zakat obligations.
Purification, on the other hand, involves ensuring that wealth acquired through permissible means remains free from any impermissible elements or earnings (haram). This occurs when an investment, despite being generally compliant with Sharia principles, earns a portion of its revenue from non-compliant activities, such as interest-bearing transactions, revenue incurred from late payment fees, gambling, or income from non-complaint product sales. Investors must identify and segregate these impermissible earnings, which are then donated to charity without expecting any reward or return, thereby ensuring that their overall income remains pure and compliant with Islamic ethical standards. This purification process is crucial for maintaining the integrity of an Islamic Sharia compliant investment portfolio and remain aligned with Islamic principles and values.
Several mechanisms are employed for the purification of Sharia-compliant investments to ensure that any impermissible income is properly addressed. These mechanisms include:
- Income Screening and Segregation: This involves scrutinizing the income streams of investments to identify any impermissible income. Financial statements are analyzed to determine the proportion of earnings derived from non-compliant activities.
- Donation to Charity: The identified impermissible earnings are calculated and then donated to charitable causes. This donation is made without expecting any financial return or spiritual reward, thus purifying the remaining income.
- Use of Financial Ratios: Specific financial ratios are used to ensure compliance. For example, the debt-to-equity ratio is monitored to ensure it stays within acceptable limits set by Sharia standards, and any income derived from excess debt financing is purified.
- Sharia Advisory Boards: These boards consist of Islamic scholars who provide guidance and oversight on purification processes. They regularly review the financial activities and ensure that the purification methodologies are appropriately applied.
- Dividend Purification: When receiving dividends from investments, a portion of the dividends that corresponds to the percentage of haram income is calculated and set aside for charity.
Our Service Offerings:
At Shariyah Review Bureau, our ‘Zakat Assessment & Purification‘ service specializes in calculating and evaluating clients’ investment portfolios, tailored specifically for entities involved in diverse investment activities.
- Zakat Calculation and Compliance: We assist family offices and investors in accurately calculating Zakat obligations based on their investment portfolios and wealth. The scope of our engagement is governed by Sharia Standard No. 35 and Financial Accounting Standard No. 9 issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Our experts ensure compliance with Islamic guidelines regarding Zakat distribution to eligible beneficiaries.
- Sharia Compliant Investment Assessment: This service includes a comprehensive review of investment portfolios to ensure they adhere to Sharia principles. We evaluate investments, screening out non-compliant elements and ensuring purification of earnings.
- Customized Investment Strategies: Our advisors work closely with investors, so that they can tailor their investment strategies in consideration to the Zakat obligations, enabling clients to optimize their portfolios while adhering to religious principles.
- Zakat Verification & Ongoing Support: Our team provides continuous support and guidance to ensure ongoing compliance with Zakat and purification principles. Regular reviews and updates are conducted to verify and accommodate changes to the calculation as per the investment structures or regulations.
