Islamic Financial Compliance

Zakah

Responsible investing for Muslims goes beyond avoiding the products and services that cause harm to society. It means helping those in need.

One of the ways we accomplish this is through zakah, the annual sharing of wealth above Muslims' basic needs. Every year, Azzad calculates the portion of our clients' assets that our faith requires to be distributed to charity. These calculations are made in accordance with the traditional 12 lunar month cycle, and usually performed a week before the month of Ramadan.

Purification

We also provide assistance with the purification process, which requires that any investment income be given to charity if it might have been generated from activities defined as unlawful according to Shari'ah-based investing principles.

Although Azzad follows strict Shari'ah-based guidelines regarding the companies and services we invest in, the investment companies in the portfolio may earn interest income, which is forbidden. We advise our clients to cleanse such income, and we calculate and accrue such purification amounts daily on our clients' investment and retirement accounts. Purification amounts are usually accrued for the 12 months prior to a week before the month of Ramadan.

Halal Investing

The word “halal” in its simplest form means “permitted.”

If an object or action is designated as halal, its use is permissible under Islamic law. The opposite of halal is haram, which means forbidden. These terms can be applied to many areas of life, including investing and finance.

Halal investing follows the principles defined by Islamic law.

Three key principles of halal investing prohibit:

  • Riba, which is often translated as interest or usury. Basically, it refers to an increase in capital without any real services provided. Riba is prohibited on both sides of the transaction – paying as well as receiving interest.
  • Gharar, which means risk, or any financial transaction or contract (such as insurance) which includes an element of chance.
  • Investing in forbidden (haram) businesses or industries. Examples include companies which derive significant income (defined as more than 5% of their total income) from the processing or sale of alcohol, tobacco or pork. Other prohibited industries are defense/weapons, gambling, pornography and financial firms that charge or pay interest.

In addition, companies selected for investment must also meet financial screens relating to their levels of debt. For example, Azzad’s process screens out companies with:

  • Debt-to-market capitalization ratio of more than 33%
  • Accounts receivable ratio of more than 45%
  • An additional requirement is to engage scholars who have knowledge of finance to certify initial compliance as well as ensure ongoing compliance.

Azzad Asset Management also employs our own disciplined screening process, automated by our proprietary software, enabling us to monitor compliance with the above investment criteria.