Purifying impermissible assets
4/1/2014 3:16:49 PM
Bashar Qasem, CSAA
President and CEO
“How do I purify the non-Halal conventional investments in my 401(k) plan and make them Halal?” That seems to be a popular question these days. Over the phone and in person, clients and friends are reaching out to us to make the transition to Halal in their financial affairs. Needless to say, I am encouraged. And I commend those people for wanting to more fully follow the principles of their faith. The fact that a person is motivated to change their ways is itself guidance from God. They should be grateful for the inspiration to do the right thing. It’s a clear sign that God is showing His favor to them. The answer to the question, however, is complicated, to put it mildly.
First, let me point out that Halal investing is derived from rules outlined by the major juridical sources in Islam: the Holy Qur’an, the traditions of the Prophet Muhammad (peace by upon him), and the consensus of his companions and our noble scholars. The last category, our scholars, are those that Prophet Muhammad himself referred to as “the inheritors of the prophets.” As such, scholarly opinions should not be taken lightly. At Azzad, we refer to the Accounting and Auditing Organization for Islamic Financial Institutions, or AAOIFI, as the gold standard for enumerating the principles of Halal investing because AAOIFI is made up of a qualified and trusted group of scholars who excel at applying Islamic principles to financial matters. We don’t make the rules of Halal investing at Azzad. We follow AAOIFI guidelines and advise our clients accordingly.
To our knowledge, there is no set of AAOIFI guidelines, however, to tell us how to purify non-Halal assets. Traded items must be Halal in the first place, according to rules of Islamic financial transactions. Acquiring non-Halal assets is problematic, but putting them back into the market by selling them is problematic, too.
So, asking how to purify or to pay Zakah on Haram (impermissible) assets is like asking the Islamic way to butcher a pig for dinner. In both cases, we are trying to apply the rules of sacred law to something that is at its core fundamentally unsound and impermissible. So, the simplest answer is to avoid the Haram to begin with. Keep your investments and financial affairs Halal, and the problem can be avoided.
Of course, it’s not always that easy in practice. Many of the people we talk with are already invested in a questionable way, sometimes only through unintentional mutual fund holdings in an employer-sponsored plan. Provided that the profession is a Halal one, any deferral amount or employer contribution to a 401(k) plan is Halal. The problem occurs when that money is invested in Haram business activities. Whatever the situation may be, if you’re interested in making your investments Halal, the first and most important step you can take is to regret your previous action. This is according to the head of our own Shari’ah Advisory Board, Dr. Mohamad Adam El-Sheikh. Dr. El-Sheikh says that other conditions apply, as well, including eliminating the Haram investment. Divesting yourself of securities that deal in irresponsible and religiously impermissible business activities creates its own set of complications. How, for example, can someone who is opposed to interest-based banking and financial services profit from the sale of stock issued by such corporations? Should the proceeds be given away? What about the initial investment?
According to Dr. El-Sheikh, the initial investment, or principal, is yours to keep, but any profit from the sale of impermissible shares should be calculated and given away to an appropriate charity.
In the case of mutual funds, calculation becomes a challenge because there is an admixture of Halal and Haram in most mutual fund portfolios, and fund managers often buy and sell the shares of different companies throughout the year. To keep track of all this, or to retroactively piece together the puzzle, can be quite a challenge.
This is why we counsel prevention at Azzad. If you’re just starting out or setting up an account for a loved one, make sure you stick to Halal investments. You’ll save yourself a headache and, more importantly, help to clear a path to God, which is our ultimate purpose in this world.
If you’re looking to wipe the slate clean and start fresh, remember these steps to repentance:
1) Regret the action: Feel remorse.
2) Eliminate the Haram: Sell your impermissible securities.
3) Resolve never to do it again: Make the firm intention in your heart.
4) Right the wrong: Determine the amount of Haram earnings and give it to rightful owners.
If it’s not possible to give the earnings to their rightful owners, they should be given to a charitable cause.
Remember that investing is still an important part of achieving your financial goals—from college savings to retirement and everything in between. Just make sure that you do things the right way. We’re proud to offer the Azzad Mutual Funds to help people like you reach your goals without compromising your values. If you don’t have these Halal mutual funds as investment options in your employer-sponsored retirement plan, talk to your human resources department and request that they add them. You can use this sample letter to get things started. Or you can request that your retirement custodian company set up a self-directed brokerage account in order to invest in Halal mutual funds.
Lastly, let me mention that the above advice is for general informational purposes only. It’s always best to consult your personal scholar or imam for an opinion that takes into consideration the particulars of your situation.
As the Holy Qur’an states:
“ … So ask the scholars if you do not know.” (21:7)
And God knows best.
Opinions expressed are those of the author or fund manager, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security and should not be considered investment advice.
Fund holdings and sector allocations are subject to change and are not a recommendation to buy or sell any security. Click here for Azzad Ethical Fund current top 10 holdings. Click here for the Azzad Wise Capital Fund current top 10 holdings.
Past performance does not guarantee future results.
The Azzad Ethical Fund is non-diversified and may invest a larger percentage of its assets in fewer companies exposing it to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. Stock markets and investments in individual stocks can decline significantly in response to issuer, market, economic, political, regulatory, geographical, and other conditions. Investments in mid-cap companies can be more volatile than investments in larger companies. Investments in growth companies can be more sensitive to the company’s earnings and more volatile than the stock market in general. Because the portfolio may invest substantial amount of its asset in issuers located in a single country or in a limited number of countries, it may be more volatile that a portfolio that is more geographically diversified. See the prospectus for more details about risks.
Investments in smaller and medium sized companies involve additional risks such as limited liquidity and greater volatility. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower rated and non-rated securities present a great risk of loss to principal and interest than higher rated securities.
The Azzad Wise Capital Fund is non-diversified with a high concentration of securities in the financial sector which can expose the Fund to more volatility and/or market risk than diversified funds. The Fund may not achieve its objective and/or could lose money on your investment in the Fund. The Fund mainly invests in securities issues by foreign entities which expose the Fund to country specific risks such as market, economic, political, regulatory, geographical, and other risks. The Fund intends to invest in certain instruments that may be illiquid. As a result, if the Fund receives large amount of redemptions, the Fund may be forced to sell such illiquid investments at a significant loss to be able to meet such redemption requests. See the prospectus for more details about risks.