What Is the Ruling on My Earnings?

Answered by Shaykh Muhammad Carr

Question 

I invested in a uranium company and sold my shares after noticing their interest earnings were over 100% of sales in 2024, according to the Annual Financial Statement. However, the trailing twelve-month (TTM) figure closer to my sale showed ~20% interest earnings. What is the ruling on my earnings? Should I use the TTM figure for purification as it is more up-to-date? Can I follow the opinion that no purification is required?

ِAnswer

In the Name of Allah, the Most Merciful and Compassionate.

Thank you for your question.

Selling your position was the right decision. However, the interest earnings, typically categorized as Finance Income, are impermissible (haram). Therefore, you must donate the portion of your dividend corresponding to interest earnings to charity.

The general consensus is that dividends must be purified if they include any proportion of income from non-compliant sources such as interest (riba). This ensures the income is halal (permissible). [AAOIFI]

To determine the percentage of your dividend that needs to be donated to charity, use the AFS (Annual Financial Statement) figures.

Impermissible Income

For a company to be considered Sharia-compliant, its core business activities must adhere to Islamic law.

If the company generates no impermissible income, there is no need to apply NPI (Non-Permissible Income) filters, and the entire dividend can be distributed to shareholders without concern.

However, many companies have other impermissible income streams. In your case, this includes FI (Financial Income), also called investment income, which is interest earned on cash held in the bank.

NPI should not exceed 5% of the company’s total revenue to remain within the Sharia universe. If the NPI surpasses this 5% threshold, the company is typically excluded from Sharia-compliant indices unless mitigating factors exist. [Mufti Ahmad, Senior Sharia Advisor, South Africa; See also AAOIFI]

The formula for calculating the percentage of NPI is:

Interest Income ÷ (Operating Profit + Interest Income) = NPI Percentage.

This percentage should then be applied to the dividend to purify it. [Ibid][1]

General Rule of Impermissible Income 

The general rule that applies to disposing of unlawful funds is as follows:

a)     it must either be given towards a charitable cause that benefits the public at large, such as public hospitals, schools, or mosques;

b)    or it should be given in charity to a person who is entitled by his need to receive charity. [Nawawi, Majmu‘ Sharh al-Muhadhdhab; Karaan, Disposal of Riba (Fatwa issued by the MJC)]

Why Employ the AFS?

Dividends are distributed periodically based on actual earnings and realized profits. The Annual Financial Statements include the operating profit and income for the period the dividend was distributed, making them the appropriate measure for this purpose.

While TTM (Trailing Twelve Months) provides a dynamic, real-time perspective, it is not the correct measure for calculating profit for a past period.

Rule of the Date in the AFS   

The date refers to the point in time when the dividend was disbursed. The information provided in the financial report is time-sensitive, and it is crucial to ensure that the correct financial data is applied to the corresponding time period.

In the South African context, companies typically report on a bi-annual basis. For example, if a company issues a dividend in December, we would refer to the financial report covering the period from April to September. Clearly, using data for the wrong time frame could result in either overestimating or underestimating the NPI. [Mufti Ahmad, Senior Sharia Advisor, South Africa; See also AAOIFI][2]

General Consensus on Purification of Income 

In Islamic finance, the purification of income, particularly dividends, is a fundamental principle to ensure that earnings comply with Sharia. There is a general consensus that purification is required.

Most scholars and Islamic finance standards, such as those by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), require the purification of dividends if they include any proportion of income derived from non-compliant sources like interest (riba). This ensures the income is halal (permissible). The opposing view, in my estimation, lacks substance. And Allah knows best.

I pray this is of benefit and Allah guides us all.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Muhammad Abu Bakr Badhib

[1] يجب ألا يتجاوز NPI أبدًا 5% من إجمالي إيرادات الشركة للحفاظ على إدراجها في قائمة الشركات المتوافقة مع الشريعة. إذا تجاوزت نسبة NPI هذه العتبة، يتم استبعاد الشركة من القائمة، ما لم تكن هناك ظروف مخففة سيتم تناولها لاحقًا. للتأكيد مرة أخرى، من المهم فهم أن الربح التشغيلي هو الإيراد الناتج عن النشاط الأساسي للشركة. ومع ذلك، فإنه ليس الشكل الوحيد للإيرادات؛ فعلى سبيل المثال، لدينا الدخل الاستثماري الذي يشكل جزءًا من إجمالي دخل الشركة والذي يُدفع منه الأرباح. لذلك يجب حساب نسبة الدخل غير المسموح به (NPI) إلى إجمالي الدخل.

تُطبق هذه النسبة بعد ذلك على إجمالي الأرباح المستلمة، ويتم تخصيص هذا المبلغ لصندوق الدخل غير المسموح به.

الصيغة المستخدمة لحساب ذلك ستكون كالتالي:

الدخل من الفوائد ÷ (الربح التشغيلي + الدخل من الفوائد) =النسبة المائوية .
بالنسبة لي، أجد أنه من الأسهل فهم هذه الصيغة بالطريقة التالية:
·       أضف دخل الفوائد (وأي دخل غير مسموح به آخر إن وجد) إلى الربح التشغيلي.
·       خذ دخل الفوائد (وأي دخل غير مسموح به آخر) وقسّمه على إجمالي الدخل.
·       هذه النسبة تمثل نسبة الدخل غير المسموح به (NPI).
·       بعد ذلك، طبق هذه النسبة على الأرباح.

[2] قاعدة تاريخ الأرباح:

هناك قاعدة مهمة تتعلق بتاريخ توزيع الأرباح. يتحدث التاريخ عن النقطة الزمنية التي تم عندها توزيع الأرباح. المعلومات الواردة في التقرير المالي مرتبطة بزمن معين، ويجب علينا التأكد من استخدام البيانات المالية الصحيحة للفترة الزمنية ذات الصلة.
في السياق الجنوب أفريقي، تقدم الشركات تقارير نصف سنوية. على سبيل المثال، إذا وزعت شركة أرباحًا في ديسمبر، سننظر إلى التقرير المالي للفترة من أبريل إلى سبتمبر. بالطبع، إذا استخدمنا أرقامًا خاطئة لفترات زمنية خاطئة، سنواجه مشكلة إما باستخراج دخل غير مسموح به أكثر أو أقل من اللازم.   مفتي أحمد سليمان رئيس مجلس الإدارة في الهيئات المالية الشرعية

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door for students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari’ah Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.