Does a Business Remain Halal If Interest Income Exceeds Sales?

Answered by Shaykh Muhammad Carr

Question

If a halal business earns more from interest than sales during a bad year, is its primary activity still considered selling goods?

Is purification required in this situation? Should purification be applied to the entire investment or only to the profits from selling stocks?

Answer

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

Thank you for your question.

Allah says,

“O you who believe, eat of the good things of that which We have faithfully provided you.” [Quran, 2:172]

The primary activity is still considered selling goods, even if the interest income exceeds sales.

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]

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] [Ibid]

General Rule of Impermissible Income

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

Where the rightful owner is known, it must be returned to the rightful owner.

Where the rightful owner is not known [or if they refuse], the funds must be disposed of in one of two ways: 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)]

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 Shari‘a. 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).

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

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 to 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‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.