While there are a few different methodologies for purifying investments, we're going to cover the AAOIFI method below.
First, we need to determine whether the company became non-compliant due to the failure of the business screen or the financial screen.
If the financial screen fails
- No need to purify
- You can either choose to sell your shares immediately, or
- Hold for another quarter as a grace period to see if the ratio falls back down below the threshold. If it doesn't, you can sell your shares. (We recommend this approach since the AAOIFI screening methodology uses market cap as the denominator value for two of the financial ratios, which means the company can fluctuate in and out of compliance throughout the year—especially during times of heightened volatility.)
If the business screen fails
- Did you buy and sell the shares within the same fiscal period? If so, no need to purify.
- If you held the shares until the end of the fiscal year, apply the formula:
(Total non-compliant income / Total outstanding shares) x (Number of shares you held at year-end)
Should I purify my investment even if the company is shariah compliant?
Even though a company with less than 5% of non-compliant revenue is considered to be shariah compliant, purification is still necessary. Follow the same steps in the "If the business screen fails" section above. Most long-term investors prefer to perform purification across their entire portfolio once a year (typically around tax season or when they're paying zakat).
This may all seem a bit overwhelming, but we’re working on making this entire process super easy in Zoya. Stay tuned!