Income Purification
Income purification is the process of identifying income that is not Sharia-compliant — such as interest earned incidentally or the share of a dividend from prohibited activities — and giving it away, usually to charity, instead of treating it as profit.
Also called: purification · cleansing · dividend purification · purification of income
It arises wherever complete avoidance is impractical. Sharia-compliant equity funds usually screen companies by their business and by financial ratios, then accept that a company may still earn a small amount of interest or prohibited revenue. The proportion of each dividend attributable to that income is calculated and paid out. Islamic banks do the same with income from a transaction later found to be non-compliant, and with late-payment charges.
The purified amount must leave the institution or investor entirely, normally to a charitable channel approved by its Sharia Supervisory Board, and must not be used to benefit the person purifying it — for example by paying their own expenses or taxes.
In practice
Purification does not make a prohibited business acceptable. It is a remedy for incidental non-compliant income in an otherwise permissible investment, not a licence to hold non-compliant assets.
Example
A fund receives a US$100,000 dividend from a company that earns 3 per cent of its revenue from interest. The fund calculates US$3,000 as non-compliant, pays it to an approved charity and distributes only US$97,000 to investors.
Commonly confused with
| Term | How it differs |
|---|---|
| Zakat | Zakat is an obligation on lawful wealth. Purification is the removal of unlawful income. Purified amounts do not count towards zakat. |
See also
- Sharia Non-Compliance RiskSharia non-compliance risk is the legal, financial and reputational risk an Islamic financial institution faces if it fails to comply with the Sharia rules that apply to it — through a flawed product, a contract executed out of sequence or income it cannot keep.
- SadaqahSadaqah is voluntary charity: giving of any amount, at any time, to anyone in need, beyond the fixed obligation of zakat and without expecting repayment.
- ZakatZakat is the obligatory annual alms on qualifying wealth above a minimum threshold, payable to specified categories of recipients. It is one of the pillars of Islam, and in some countries it is collected by the state.
- Sharia Supervisory BoardA Sharia Supervisory Board is the panel of scholars responsible for reviewing and overseeing an Islamic financial institution's compliance with Sharia — approving products and contracts, issuing rulings and reviewing whether operations follow them.