Many Muslims who own shares hear the phrase "purification of dividends" and are not sure what it means. Is it a type of zakat? Is it a penalty? Does it mean the investment is haram?
It is none of these. Purification is a way of cleansing a small impermissible part of your investment income, so that what you keep is wholly halal. This post explains the idea, the usual method, and the points where scholars differ.
What is the purification of dividends?
A dividend is a share of a company's profit paid to its shareholders. Almost every large listed company, even one with a permissible main business, has some income that a Shariah screen would not approve. A common example is interest earned on cash held in a bank.
Under the mainstream approach, set out in the AAOIFI Shariah Standard on financial paper (shares and bonds), a Muslim may hold shares in a company if two things are true:
- its core business is permissible, and
- its debt, interest-bearing deposits and impermissible income stay within set limits.
The same standard says that the impermissible share of income, though small, must not be kept by the shareholder. It should be removed from the dividend and given away. That removal is called purification, or tathir in Arabic.
If you are new to how companies are filtered in the first place, our earlier post on how a Shariah stock screen works covers that step.
Why is purification needed at all?
The answer comes from a principle found throughout Islamic finance: what we earn and benefit from should be clean. The Prophet ﷺ said, as recorded in Sahih Muslim, that Allah is pure and accepts only what is pure.
Scholars who permit investing in mixed companies do so on a practical basis. A modern listed company is hard to separate into permissible and impermissible parts, and the impermissible part is small. Allowing the investment, while asking the investor to cleanse the small amount involved, is a way of balancing necessity with caution.
Purification is therefore not a sign that you have done something wrong. It is part of what makes holding a screened share acceptable in the first place. It is also tied to riba, because interest income is the most common source of the impure portion. Our earlier post on what riba is explains why interest is treated so seriously.
How does the calculation work?
The method is simple in principle. You work out what proportion of the company's income came from impermissible sources, then apply that proportion to the dividend you received.
Here is an illustration with made-up numbers, for teaching only:
1. A company's annual report shows that 2 pence in every £1 of its income comes from interest and other impermissible sources. 2. You receive dividends of £200 from that company over the year. 3. The amount to purify is 2 pence in every £1 of the dividend: £200 × 0.02 = £4.
In practice, you rarely have to read company accounts yourself. Shariah screening providers and funds often publish a purification ratio, sometimes per share and sometimes for a whole fund. Using a published ratio from a source you trust is the usual route. Check how it is presented, as some give a figure per share and others a percentage of the dividend.
Two further points are worth knowing:
- Reinvested dividends still count. If dividends are automatically reinvested, you have still received the benefit, so the purification amount is still worked out.
- Records matter. Keeping a simple note of dividends received and the ratio applied makes the yearly calculation easier.
Where does the purified money go?
The impure portion is not yours, so it cannot be kept, used to pay a bill or counted towards your own needs. Scholars generally agree on several rules:
- It should go to charity, particularly to people in need or to general charitable causes.
- It does not count as zakat, because zakat has its own conditions and recipients.
- It is not treated as voluntary sadaqah that earns reward. You are returning something that was never rightfully yours, not making a gift.
- It should not be used to pay tax or any obligation you owe personally.
Many scholars also say it is not appropriate to give it to a mosque or charity for purposes that benefit you directly. If you are unsure whether a given cause is suitable, ask a qualified scholar.
Do scholars differ on purification?
Yes, on some details, and it helps to know where.
Dividends only, or more? The most common view is that purification applies to dividends actually received. Some scholars hold that it should also apply when you sell shares at a higher price than you paid, because the share price partly reflects the company's impermissible income. Others say the price reflects the whole business and so no extra purification is needed.
Shares that pay no dividend. Some companies pay no dividends. One view is that nothing is due until you receive income. Another is that, because you own a share of the company's earnings, some purification may still be due, in line with the impermissible proportion. Practice varies between screening bodies.
Which ratio to use. Different Shariah boards use different screening thresholds and ways of calculating the ratio. Two reputable providers can produce slightly different figures for the same company.
If these differences affect you, the sensible course is to follow one consistent, well-reasoned approach and ask your own scholar which one suits you.
Purification and zakat are different
It is easy to mix these up, so here is the contrast:
- Zakat is an obligation on wealth that reaches the nisab and is held for a lunar year. It is paid at 2.5% on zakatable wealth, and goes to the eight categories of recipient named in the Qur'an (Surah at-Tawbah, 9:60).
- Purification removes impermissible income. It is not a tax on wealth, and the amount depends on a company's income mix, not on how much you own overall.
Paying one does not replace the other. Our earlier post on zakat on shares shows how the zakat calculation works.
A note on your own situation
This post is general education. How to apply purification depends on what you hold, how it is held and which scholarly opinion you follow. Please ask a qualified scholar about your own affairs. For decisions about saving, investing or pensions, a regulated financial adviser can help you understand your options. MoneyHelper (moneyhelper.org.uk) also offers free, impartial guidance in the UK.
Frequently asked questions
Is purification of dividends the same as zakat?
No. Zakat is an obligation on eligible wealth, paid at 2.5% to the eligible categories of recipient. Purification removes a small impermissible part of your income and is given to charity without the expectation of reward.
Do I need to purify if I invest through a fund?
It depends on how the fund handles it. Some Shariah-screened funds purify at fund level, while others leave it to the investor. The fund's documents or its Shariah board should say which applies. If it is unclear, ask a qualified scholar.
Can I give the purified amount to a mosque or to my relatives?
Scholars generally say it should go to charity for people in need or to general charitable causes, not to benefit you directly. Whether a particular mosque project or relative is suitable is a question for a qualified scholar.
What if I forgot to purify in earlier years?
Many scholars advise making a reasonable estimate of the amount missed and giving it as soon as you can, with sincere repentance for the oversight. The details depend on your circumstances, so please ask a qualified scholar.