Islamic Fund Management
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Purification of Income Earned
There are two levels of purification involving Shariah non-compliant investments of Islamic
funds, as follows:
1. Excess capital gain from the disposal of Shariah non-compliant securities. This occurs
when an Islamic fund invests in Shariah non-compliant or reclassified securities. All
excess capital gains are considered impure, hence must be channelled to charitable
bodies as approved by the Shariah advisor and trustee.
2. Income generated by the fund via Shariah non-compliant investment activities such as
those involving interest, selling pork, alcohol and gambling, where the percentage
should not exceed 5%, as indicated earlier. Scholars have different opinions on the
calculation of purification income and who should conduct this process (i.e. the fund or
the investors), as discussed i
Box 3.1: Scholars’ Opinions on Purification of Shariah Non-Compliant Income
Scholars’ opinions on the responsible parties to perform purification:
1. The purification should be done at the fund’s level, i.e. the fund manager will calculate the Shariah
non-compliant income and channel that amount (for example, 2%) to approved charitable bodies
before any profit/dividend is distributed to the investors/unit holders.
2. The purification should be conducted by the investors, not the fund. In this case, the fund manager
will only report the Shariah non-compliant income on a unit basis. It will be the responsibility of
the investors to calculate the purification amount, based on the number of units that the individual
holds. This is because the investors can be a mix of Muslims and non-Muslims. It is therefore not
obligatory for non-Muslims to adhere to the Shariah requirements for purification.
Method of calculating purification income:
1. In the case of non-permissible income , purification must be carried out on the total income,
regardless of the source of income or whether the company has gained profits or whether
dividends have been distributed. In the case where the actual amount of the non-permissible
income cannot be obtained, such amount will be estimated. Purification in this scenario will be
carried out by dividing the total non-permissible income by the total shares of the company and
then multiplied by the average number of shares owned by the fund during the period. The
purification amount will then be pro-rated according to the holding period.
2. In the case of companies involved in conventional lending, purification of the profit arising
from such loans is based on the following:
 The total amount of conventional loans of the company is divided by the company’s total assets.
 The result is then multiplied by the total net dividends received by the fund.
 The result will be the total net dividends received by the fund arising from conventional loans.
 The amount will then be divided by two as the dividend is derived from capital and labour. The
portion arising from capital must be channelled to charity because this had been obtained
from a Shariah non-compliant source. The portion derived from labour can be kept because
the related business activities are permissible. Purification of profit from conventional loans
cannot be carried out when the companies do not pay any dividend. For short-term
conventional loans, purification will be undertaken in accordance with the tenure of the loan
over the financial period.
Source: ISRA (2015)