What Is Purification and Why Does It Matter?

You choose a company whose main business is permissible and whose financial ratios pass Shariah screening. Does that mean every dollar the company earns is halal?

Not always.

A company may pass Shariah screening while receiving a small amount of income from non-permissible sources, such as interest earned on cash held in a conventional bank.

Purification is the process of identifying the investor’s share of that non-permissible income and giving it away. This allows Muslim investors to remove income that should not form part of their personal wealth.

Why can a halal stock contain non-permissible income?

Many publicly listed companies operate within conventional financial systems.

A company with a permissible main business may keep some cash in interest-paying accounts or receive a small amount of income from another non-permissible source.

This does not automatically make the stock non-compliant. Shariah screening standards distinguish between:

• A company whose main business is prohibited
• A company with a permissible main business but a small amount of incidental non-permissible income

A company whose main activity involves conventional lending, gambling, alcohol or another prohibited business would not pass the business activity screen.

A company with a permissible main business may remain eligible if its non-permissible income and financial ratios remain within the limits set by the screening methodology.

Under AAOIFI Shariah Standard No. 21, income from prohibited sources must not exceed 5% of the company’s total income.

However, this allowance does not make the non-permissible income halal. The investor’s share of it must still be purified.

What does purification mean?

Purification means removing the portion of investment income connected to non-permissible sources.

The investor does this by giving the calculated amount away for charitable or public benefit, without treating it as personal income.

Purification does not mean that the entire investment return is impure. It applies only to the identified non-permissible portion.

For example, imagine that a company mainly earns money by selling permissible products. It also receives a small amount of interest from cash held at a conventional bank.

If the company passes the required Shariah screens, a Muslim investor may own its shares. The investor must still remove the portion of income connected to that interest.

The 5% limit is not the purification amount

This is an important distinction.

The 5% figure used under the AAOIFI screening methodology is a maximum limit for a company’s non-permissible income. It is not an amount that investors can automatically keep.

If non-permissible income represents 2% of the company’s total income, the relevant purification calculation is based on that 2%.

The investor does not ignore it simply because it is below 5%.

The investor also does not purify only the amount above a certain level. The identified non-permissible portion is removed.

If the company’s non-permissible income exceeds the permitted limit, purification alone does not make the stock compliant. The company may fail the Shariah screen, and the investor should follow the divestment guidance provided by the relevant Shariah board or screening methodology.

How is purification calculated?

Under the AAOIFI approach, the purification amount can be calculated using the company’s total non-permissible income and the number of its outstanding shares.

The basic calculation is:

Purification amount per share = Total non-permissible income ÷ Total outstanding shares

The investor then calculates:

Personal purification amount = Purification amount per share × Number of shares owned

Example

Imagine a company reports:

• Total non-permissible income: $2 million
• Total outstanding shares: 10 million

The purification amount per share would be:

$2 million ÷ 10 million shares = $0.20 per share

If you own 100 shares, your purification amount would be:

100 shares × $0.20 = $20

You would give away $20, based on the relevant reporting period and the methodology you follow.

In practice, identifying the company’s exact non-permissible income can be difficult. It may require reviewing financial statements and separating interest or other non-permissible revenue from the company’s total income.

A Shariah screening provider may calculate and publish a purification amount per share or a purification factor for investors.

Is purification based only on dividends?

Purification methods can differ.

Some screening providers calculate purification by applying a non-permissible income percentage to the dividends received.

For example, if you receive a $100 dividend and the provider calculates that 2% should be purified, the purification amount would be:

$100 × 2% = $2

AAOIFI Standard No. 21 uses a broader per-share calculation based on the company’s non-permissible income. Under this approach, purification is connected to the investor’s share of that income, whether or not the company distributes all of its earnings as dividends.

For this reason, investors should not combine figures from different methodologies. Follow one recognised standard and use the purification instructions provided by the platform, fund or Shariah board responsible for the screening.

Who is responsible for purification?

Responsibility depends on how the investment is managed.

If you invest directly in individual stocks, you may need to calculate and give away the purification amount yourself.

A broker or screening platform may provide the relevant figure without automatically deducting it from your account.

If you invest through a Shariah-compliant ETF or managed fund, the fund manager may carry out purification on behalf of investors. Check the fund’s documents or Shariah report to confirm:

• Whether purification is completed by the fund
• How the amount is calculated
• Whether investors need to take any additional action

Do not assume that purification is automatic simply because an investment is described as Shariah-compliant.

Where should the money go?

The purification amount should be given away for charitable or public benefit.

It should not be:

• Kept as personal income
• Reinvested for personal profit
• Used to pay personal expenses
• Treated as payment for a personal service
• Used to obtain a direct personal benefit

Purification is the removal of income that should not remain in the investor’s wealth.

Because purification and Zakat follow different rules and purposes, the purification payment should not automatically be treated as a replacement for Zakat.

If you are unsure where the amount can be directed, consult the guidance of the relevant Shariah board or a qualified scholar.

When should you purify?

The timing depends on the standard and service you follow.

AAOIFI links the calculation to the company’s financial reporting period. Screening platforms may publish purification figures quarterly or annually after updated financial statements become available.

A practical process may include:

1. Check whether the company remains Shariah-compliant.
2. Find the purification amount or factor for the relevant period.
3. Confirm how many shares you owned during that period.
4. Calculate the amount using the stated methodology.
5. Give the amount away.
6. Keep a simple record of the calculation and payment.

Do not reuse an old purification figure without checking whether the company’s income or number of shares has changed.

What if a stock becomes non-compliant?

A company’s Shariah status can change when it publishes new financial information, changes its activities or crosses one of the required financial limits.

Purification should not be confused with the action required when a stock becomes non-compliant.

Purification removes the investor’s share of incidental non-permissible income from a stock that meets the relevant screening conditions.

If the stock fails the Shariah screen, the investor may need to sell it within the period permitted by the applicable methodology. Additional rules may determine whether any income or gains must also be purified.

Follow the notice and instructions issued by the screening provider or Shariah board rather than relying on an earlier compliance result.

Purification and Zakat are different

Purification and Zakat may both involve giving away money, but they are not the same.

Purification removes non-permissible income linked to an investment.

Zakat is a separate religious obligation calculated according to the applicable rules for eligible wealth.

Paying a purification amount does not automatically fulfil your Zakat obligation. Paying Zakat also does not automatically remove non-permissible investment income.

Investors should calculate each one separately according to the guidance they follow.

Why does purification matter?

Shariah screening allows investors to identify companies whose main business and financial ratios meet defined Islamic standards.

Purification completes another part of the process. It helps ensure that the investor does not personally benefit from the small amount of non-permissible income that may exist within an otherwise eligible company.

It also reminds investors that Shariah compliance is not a one-time label. Companies publish new results, their income sources change and their financial ratios move.

Halal investing therefore requires both screening before investing and continued monitoring after the investment is made.

Quiz

Question 1

A company has a permissible main business and earns 2% of its income from non-permissible sources. What does the 5% AAOIFI limit mean?

• A. The investor can keep the entire 2% because it is below 5%
• B. The company may pass this part of the screen, but the non-permissible portion still requires purification
• C. The investor must always give away 5% of the investment

Correct answer: B

The 5% figure is a screening limit. It does not make income below that level permissible. The identified non-permissible portion must still be removed.

Question 2

A company has $1 million in non-permissible income and 10 million outstanding shares. What is the purification amount per share under the AAOIFI calculation?

• A. $0.01
• B. $0.10
• C. $1

Correct answer: B

The calculation is $1 million divided by 10 million shares, giving a purification amount of $0.10 per share.

Question 3

Which statement correctly describes purification and Zakat?

• A. Paying purification always replaces Zakat
• B. Zakat and purification are the same calculation
• C. Purification removes non-permissible income, while Zakat is a separate religious obligation

Correct answer: C

Purification and Zakat have different purposes and calculations. Investors may need to address both separately.

Sources

• https://aaoifi.com/ss-21-financial-paper-shares-and-bonds/?lang=en
• https://www.oicexchanges.org/files/1---shari-ah-screening-in-the-islamic-capital-markets-dr-hamed-merah-secretary-general-aaoifi.pdf
• https://aaoifi.com/standards-under-development-3/?lang=en
• https://tabadulat.com/blog/aaoifi-standards-explained-what-makes-a-stock-halal
• https://www.sp-funds.com/purification-calculator/

Frequently asked questions

Does income below the 5% AAOIFI limit still require purification?

Yes. The 5% limit is a screening threshold, not an amount investors can keep. The identified non-permissible portion must still be purified, even when it is below 5%.

How is purification calculated under the AAOIFI approach?

Divide the company’s total non-permissible income by its total outstanding shares to find the purification amount per share. Multiply that amount by the number of shares owned to calculate the investor’s personal purification amount.

Is purification based only on dividends?

Methods differ. Some providers apply a non-permissible income percentage to dividends received. AAOIFI Standard No. 21 uses a broader per-share calculation based on the company’s non-permissible income, whether or not all earnings are distributed as dividends. Investors should follow one recognised methodology rather than combine figures from different methods.

Does purification replace Zakat?

No. Purification removes non-permissible investment income, while Zakat is a separate religious obligation calculated according to the applicable rules for eligible wealth. Investors should calculate each separately according to the guidance they follow.

Can purification make a non-compliant stock compliant?

No. If a stock fails the required Shariah screens, the investor may need to sell it within the period permitted by the applicable methodology. Follow the screening provider’s or Shariah board’s instructions, including any additional rules for purifying income or gains.

Related terms

• Shariah Compliance
• Halal Stocks