Zakah and Purification: Forgotten Pillars of Islamic Finance?
Most people know the basics of Islamic finance: avoid interest, stay away from prohibited lines of business, and make sure your advisory board has the right credentials. But it’s not every day that people talk about zakah and purification. Both concepts are inseparable from Islamic finance but are regularly omitted from the conversation. Let’s look at why this is and what’s being doing about it.
As the third pillar of Islam, zakah is universally recognized among Muslims as a requirement for the proper management of their finances. Every Muslim must pay zakah on certain assets that are at or above a minimum amount and have completed a holding period of 12 lunar months. Purification is an essential, though lesser known, aspect of Islamic investing that involves the donation of income earned from any unintended and unacceptable business activities by companies in which a shareholder is invested. (Since it is possible to unintentionally earn small amounts of prohibited income from otherwise permissible investments, Islamic scholars advise cleansing accounts of such money.) Because zakah is not paid on amounts coming from unacceptable or impure sources, purification amounts are calculated first and then subtracted from client account balances before determining zakah totals. The process results in two dollar amounts, both of which are to be given to charity.
Putting it in practice
Part of the reason zakah and purification are not always talked about stems from their complexity. Azzad Asset Management has sought to take the confusion out of calculating zakah and purification amounts by automating the process and issuing standardized statements for its clients on an annual basis.
Following best practices and guidelines issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Azzad uses AAOIFI Standard Number 21 as the engine for its proprietary Zakah and purification calculation program. The end result for 2014: Azzad representatives say that approximately $3 million will be donated to charity in the United States and abroad based on the amounts tallied for clients.
Long story short: an American Islamic investment firm is putting the loftier goals of Islamic finance, including zakah and purification, into practice right here in the United States.