More Than Spring Cleaning: A Deeper Look into the Purification of Money
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More Than Spring Cleaning: A Deeper Look into the Purification of Money
Owaiz Dadabhoy: We’re going to go ahead and get started because it is noon here, Pacific time. 3 o’clock Eastern Whatever other time zone you want to look at. Central, 2pm, right? Just to cover everyone. As you know, we do this webinar once a month and it is something that we send out to our clients. We actually appreciate the conversation quite a bit because we end up presenting something at the beginning and then we get lots of questions on the chat. It is Ramadan so we’ll see what kind of participation we get today. It’ll be interesting. And it is not a very specific conversation, so it’s not talking about education savings accounts. It’s really talking about, you know, three main things, which I’ll get into in a second. But, as we have people rolling in, I thought I would, as I always do, give you a top 10 or top 8 or top 9 list. Today, it happens to be a top 9 list. So, as we are waiting for those folks, you know, today we are going to be talking about purification, zakat, and the resetting of Islamic principles of investing — very briefly on that part — so I thought I would do something on purification. This one is purification of the heart. And so, what are ways to purify the heart? And become more spiritual. So, number 9 is to express gratitude to our creator, to Allah, subhana wa ta'ala, for his blessings upon us. To actually think about what those blessings are and that makes us, you know, makes you understand and puts into context what you have compared to others. Number 8, think positive thoughts about Allah, subhana wa ta'ala, indeed, having good thoughts concerning Allah is from the perfection of the worship of Allah. Salawaat on the prophet, sallalahu alayhi wassalam (peace and prayer be upon him). Allah and his angels send blessings on the prophet. All you who believe send blessings on him and salute him with all respect. So, that will get you closer and help to purify your heart. Number 6 is to make dua or supplication to Allah, subhana wa ta'ala, for all of your needs. That is a form of worship, as we know, because if you are asking some person to help you with something, that means you believe that they can accomplish something for you. If you are asking Allah, subhana wa ta'ala, for something, that means you believe in him, right? So, if you believe in him, that’s one of the main criteria of being Muslim. Seek Allah’s forgiveness by saying, astaghfirullah. Number 4, call on Allah by his beautiful names. And, you know, we know that if you want to ask for relief, for health purposes or something, you can, you know, call upon Shafi. If you want, you can call him by different names. Al-Kareem, for generosity. There are so many different names and attributes you can call Allah, subhana wa ta'ala, though. Recite the dearest phrases to Allah. So, the dearest phrases to Allah are, Subhan Allah and Hamdulillah, La ilaha illa-Allah, Allahu Akbar. Those are amongst the dearest phrases to Allah, subhana wa ta'ala, so you can use those, as well. And then, read the holy Quran with understanding. During the month of Ramadan, many people complete more pages, or the entire Quran, in the month. Maybe even more than one time. If you can add some understanding of the Quran, as well, there is so many apps now that you can do that with. It makes it so easy. And then the number 1 is to prioritize the five daily prayers. This is the best way to connect and also the best way to purify...one of the best ways to purify your heart. So, with that, now we went from a few people to a few more. So, we will go ahead and get started today. I do have, you know, one of my friends and longtime colleagues here with me. We are going to be recording this presentation and will put it on our website for future use. If you go to amanafunds.com/webinars you will find it there. You will also find the Halal Money Matters podcast on that website. You can also find the Halal Money Matters podcast on, you know, in iTunes and on Google, Android devices, whatnot. Wherever you find podcasts, you should find it there. Before we end the session, you’ll have a bunch of different websites up that we refer to and then you can look at them later on. So, as I mentioned, we are going to talk about three main items today. One is we are going to do a quick reset about what are the principles of Islamic investing. We’re going to talk about zakat because the month of Ramadan is... that month that the majority of people say, “Okay, I need to calculate my zakat,” and some people pay it all now, some people pay it throughout the year. So, we’ll talk a little bit about that. We will talk about qualified accounts versus non-qualified accounts, or more specifically accounts that you have access to without a penalty and those that you don’t. Then finally, we talk about further purification, even after the zakat purification. Even after other ways that, you know, we are following the Shariah standards. There is a further purification. We’ll talk about that. So, the person that we are going to rely on today to do most of that is Monem Salam, who has been with Saturna Capital’s Amana Mutual Funds since 2003. You know, he was here in Bellingham, Washington, for many of those years, and then he went to Malaysia for six or seven years and when he came back, he took on some massive responsibilities with Saturna and we’re glad that he did. He’s now the Executive Vice President. He manages two of the Amana Mutual Funds and we are glad that he does that for us. He also runs the distribution of the Funds and also runs, you know, overseas, the Saturna Sdn. Bhd. office in Malaysia. So, those are some of the things he does. I might be missing a few things. So, he’s a busy person. He’s also co-authored a book called The Muslim Guide to Investing & Personal Finance. It is an easy-to-read book. It talks about not only investing but finance and insurance and other, you know, other pieces of information that you might find useful. So, with that, we’re going to go ahead and get started. [In the name of Allah, most compassionate, most merciful, All Praise is due to Allah, prayers and peace be on the Messenger of Allah]. We wish you all Ramadan Mubarak, and you know, soon to be Eid Mubarak. It’s only 15 days away or so. So, we hope it’s going well for you. Again, go ahead and start asking your questions. Monem, I would like to ask the first question, which is... if you can just take us through the basics of what is Islamic investing? And then we’ll start to do the zakat and purification thereafter.
Monem Salam: Sure. Thank you. As-salamu alaykum, everyone. Bismillah. Alhamdulillah. [Prayers and peace be on the Messenger of Allah.] First, I want to thank you for having me on the call. It’s always a pleasure to see our shareholders getting on. I think the Islamic investing can be broken down into three different categories. So, and then one after another we basically filter out... So, if you take the entire universe of global companies that are out there... all of the companies, maybe there’s a list of about 10,000 publicly traded companies, right? And so, the first thing we are doing is we are doing a qualitative screen. And what a qualitative screen basically means is we are eliminating companies that, in one form or another, are doing something that... the majority of the revenues are coming from haram. Right? So, we are eliminating banks... life insurance companies, just insurance companies, alcohol companies, pork products, you know, those types of things. We are eliminating those out. And the way that we do that is basically through a company description. We’re looking at the description and look at if there’s anything wrong that they’re doing, and we’ll eliminate those out of the universe. That probably gets us from 10,000 maybe to about 2,500 or so. And then, from there, our second screen is a quantitative, so these more numbers oriented. In the quantitative screens what we are trying to do is make sure that a company — on the financial statement side of it — is not exposed to a lot of riba. And so, we do that in three separate criteria. Number one is we look at how much of a company’s financings...short term and long term... are being done by debt. That’s done with a total debt to a 12-month trailing market capitalization. Number two is we want to know and make sure that the company is not trading more cash than assets. Right? And because if we have more cash than assets, then we have to treat the company as cash and we cannot buy it or sell it at a discount or a premium. So, that one is accounts receivables to total assets. And the last one is a percentage of haram revenues. Because there are going to be companies out there whose primary business is in a certain industry, but they might have some ancillary business out there that is involved with something haram. So, we want to keep that number below 5%, okay? Now, this is the criteria that we at Saturna Capital use for the Amana Funds. There are other criteria that are out there, as well. There’s a paper that I wrote called Evaluating Islamic Standards, and the gist of the paper basically says that it doesn’t matter, you know, what criteria you use, as long as it’s being done by a reputable scholar or a reputable board. Right? They are able to audit whatever you are doing, right? And not one criteria supersedes another. This is what ikhtilaf or a difference of opinion is all about.
Owaiz Dadabhoy: Right. So, thank you for that reset. Quick question for you. The question comes up every now and then. It’s... why can we have any haram revenue?
Monem Salam: That’s a good question. Ideally... it’s more a matter of diversification. You know, I think the anecdotal story that I like to tell is, when we first came up with the criteria back in 1986 or 1985 when the Funds were launched, we had a scholarly group sitting in and one said, “You know I don’t want the financing of the company coming from something haram.” And so, we went back and looked at the S&P 500 and we came up with, you know, a list of companies that had no debt on their balance sheet. That’s possible to do. But then, another one said, “Yeah, that’s true, but I don’t want any companies with cash because cash will generate interest.” And if you remember, back in the 80s, cash was generating about 9 or 10% rate of return. So, “I don’t want any interest on my cash.” And so, when we went back and looked at the S&P 500 companies that have no cash and no debt, right? You can imagine how many companies there were. So, we try to keep all of these numbers as close to zero as possible but for diversification purposes, in a mutual fund, it’s important for us to be able to have some leeway in allowing that to happen.
Owaiz Dadabhoy: And that’s what we are going to purify. That’s one of the purposes of this call.
Monem Salam: That is correct.
Owaiz Dadabhoy: Okay, so there was a financial advisor—to your point—who asked me a few years ago, “You know, I have a doctor here in Houston. He wants to invest only in companies that don’t have any debt and they don’t have haram revenues. Can you find that for us?” So, we looked it up. We went through all of North American companies. And we found 7 companies and 5 of them were financial services. So, the scholars... why did the scholars do this? Why did they say, “We’re going to give some latitude?” Is it just so Muslims can also participate and build wealth? Was there enough good reason to do that? And do you talk about that in your Evaluating Islamic Standards write-up.
Monem Salam: Yeah, we actually do. And the idea here, again, is that you have to basically have an assumption that for a Muslim to invest in a market is a general need in the community. That’s what the scholars said, that in order for us to be able to save for our children’s education, save for retirement, those types of things, we have to be able to invest in the market. Right? There are other investments out there. You can do a business; you can do real estate. But those usually take a lot of upfront cash to do, whereas the market you can start off—in our mutual funds, for example—at 250 dollars. If you’re in a qualified account: 100 dollars. So, it’s small chunks that you can save for the long-term. And based on that, basically there’s a general need, and that’s why the scholars allowed the leeway. But as you mentioned, there was a criteria over there and that was there has to be some form of purification that you’re doing on those portions of the revenue of the company that are haram.
Owaiz Dadabhoy: So, Saturna Capital, when it launched the Amana Mutual Funds, well actually, it was before Saturna Capital. So, Amana Mutual Funds were launched in 1986 after the idea came about in 1984. Paperwork processes were put through, the Amana Income Fund launches in 1986. There was no standard. There were no scholars that came together beforehand to say, “Hey, what are we going to do in the mutual fund?” So, a group of people came together years later through AAOFI, right? And you talk a little... you actually write about this. And so, this is not the only standard, but how different is that standard compared to others? I mean, I think it’s miniscule differences but if you can talk about that a little bit...
Monem Salam: Yeah, sure, absolutely. So, there are a couple of things there. So, actually, AAOFI came even later than that. The standard on investing came later for AAOFI. The Dow Jones Islamic Index had a Shariah board. They were the ones who basically came up with a criteria that was after ours. So, AAOFI came two or three years later. And remember, you know, the differences are in the margins, they’re not in the core. And what I mean by that is I don’t think any scholar, or any criteria will say, “You know what? Alcohol is allowed.” So, you’re not going to find those differences, right? What you are going to find is differences in two areas in the financial screening part of it. The first area is going to be in the actual number itself. Is it 30%? Is it 32%? And then, the second one is actually in... how do you value a company? Okay? So, I’ll give you examples of those. So, let’s talk about the valuation part of it. There are, even amongst analysts, amongst industry professionals, there are different ways and debates on what is the true value of a company? Is it enterprise value? Is it the assets of the company? Is it market capitalization? All of those things are there. So, if a scholar takes one opinion versus another based on a certain analyst, they might decide, “You know what? Market cap is the way to look at value.” Another scholar might say assets is the right way. Nobody will argue that debt is not allowed, so that debt over some denominator that’s going to be a difference of opinion. Okay? So, that’s the first thing. Number two is on the percentages. You know, if you look at debt to either assets or to market cap, you know, you’re not going to get a difference of opinion between, let’s say, 75% and 25%. It’s between 30%, 33%, some might go up to 35%, and they’re just basically looking at it, saying, “What is an amount that’s too much for us to be able to stomach?” As far as the Islamic criteria is concerned. Again, just to reiterate, when we came up with these criteria, we were basically pioneers in this area, back in 1986. Although people joined later on and said, “You know what? You’re doing good, but there might be a way for us to look at value differently,” and that’s what they’re going to do. And they’re not static. For example, the Dow Jones Islamic Index actually changed their criteria along the way. Right? So did AAOFI as well. So, as they come up with more information, they are willing to adapt and change.
Owaiz Dadabhoy: That’s right. Thank you for that. I don’t see any other questions on this part of it, so we’ll move to the next section here which I think people are waiting for, given that it is Ramadan and people are trying to calculate their zakat. So, there are different ways to calculate zakat. There is a rule on 2.5% on the total value of assets. There’s a rule about 10% of the gain on assets. So, if you could talk... why don’t we start off with that: the differences between those two, and how you look at that. And then we’ll get into it a little bit deeper.
Monem Salam: Okay, let’s set some commonalities first and then we’ll go from there. The commonality is that, you know, you have to have wealth in order to pay zakat. Right? Another commonality is with the wealth that you have, at least one year, one lunar, or one calendar year, has to go by. So, if you just came into the wealth, let’s say, three or four months ago, right? This year in Ramadan, you won’t have to pay zakat on that. You’ll have to wait until next year to do that. So, that’s just level setting the field a little bit. So then, you get into... how do you calculate zakat. So, the other thing that I want to mention is everybody knows... if I asked anybody out there how much zakat is owed, the standard answer will always be 2.5%. That’s been drilled into our heads. However, generally speaking, in Islam, there are different calculations for different types of assets. Clear. There’s no difference of opinion there. A certain type of asset has 2.5%. A certain asset has 10%. A certain asset might have even another formula, okay? So, now the question becomes, right? When you’re looking at the stock market, what type of asset it is... Right? Is investing in the market akin to owning a business? Is it akin to a productive asset, meaning something like owning a piece of land that has produce on it? Or is it a non-productive asset, basically just like a wealth accumulation. If you can separate those out, and that’s what the difference of opinion comes in, then the secondary comes in as to what calculations you try to make. So, for example, Owaiz... let’s supposing you follow the 2.5% or the 10%, you might consider, you know, that the stock value is static wealth. It’s wealth you have, you want to calculate on it, so you come up with the 2.5%. I might say no, stock is not a static asset, it’s a productive asset, right? You’re buying it, the company is using the money to grow the operations, hiring people, those types of things, and if I follow those criteria and say yes, it’s a productive asset, then I would use the 10% of the gains rather than what you’re using which is 2.5%. So, the difference is not whether it’s 2.5%, 10%, or anything else. The difference is... what is that asset that you’re looking at?
Owaiz Dadabhoy: Right?
Monem Salam: Does that make sense.
Owaiz Dadabhoy: It does but the 10% versus the 2.5%... which one is harder to calculate?
Monem Salam: Definitely, I think the 10% would be harder to calculate and that is because you have a beginning year value and then you have adjustments along the way. The increase value or decrease in value. You have inputs, money coming in, money going out, in your own personal account. And then you have an ending value. So, it’s much more difficult to calculate the 10% value rather than 2.5% because 2.5%, all it says is, “Have you had it for a year?” Yes, you have. What’s the value date on, let’s say, the first of Ramadan? It’s x and you just take 2.5% for that x and you basically, you know, pay that amount. Very simple to do that part of it and it’s a little bit more complicated to do the 10%.
Owaiz Dadabhoy: Yeah, so, I was going to say that we calculate the 10% and part of the reason is that it’s more difficult. That 10% number is more difficult. We are not giving you a fatwa or an opinion that that is the way to do it. We’re saying that is one of the ways to do it, and so we calculate that for you. If you prefer the 2.5% method, you can calculate that yourself, very easy to do. So, for those people that want to calculate 10%, we have a way to do it. If you have anything else to add to that, and then how would they sign up for that.
Monem Salam: Yeah, so we have a zakat brochure on our website. You would need to download that and then there’s a form on there that actually gives us permission to do that, and then send you — annually — a statement that basically shows what your zakat is. And this is done on the calendar year basis. And because it’s done on the calendar year, we adjust it so that it’s not actually 10%, it’s 10.3%. So, we’re adjusting for the Gregorian versus lunar calendar.
Owaiz Dadabhoy: It’s a couple more days.
Monem Salam: A couple more days, right. And so, what we’re doing basically is, again, we take your values minus all of the inputs that you’ve put into the account and adding back the dividends. At the end of the year, if your value is more than your beginning of the year, then we take 10% of the gains. 10.3% of the gains and tell you what that number is. If there’s a loss for the year, then you don’t owe zakat for that year at all.
Owaiz Dadabhoy: Yup. Okay. Very good. I do see one clarifying question there from somebody but other than that, no others. So, one other question for you... you mentioned that you have to hold the wealth for a year. This might be too technical, but I’ll ask this question. So, let’s say somebody had $100,000 in a personal account and that was a year ago, right? It was after last Ramadan, so it was after Eid of last year, they had $100,000 and the market actually did quite well after the first quarter, so they’re at $130,000. Alright? Just giving an example, not guaranteed or anything. $130,000 as of now. So, they gained $30,000 without putting anything in there. Using the 2.5% rule, they did not have that $30,000 the whole year. They didn’t have it at the beginning. So, do you know whether that... this question comes up too, right? Are they going to use $100,000 or $130,000 to calculate their zakat?
Monem Salam: On the 2.5%, it’s definitely on your asset value, whatever that asset was, at the time that you’re making the valuation. So, no matter if you started with $100,000, $125,000 or $75,000, what you’re not looking at is what you put in. You’re looking at... one year has gone by and what is the value on the date that you’re calculating on. So, on this particular example you gave, it’s going to be on $130,000.
Owaiz Dadabhoy: $130,000.
Monem Salam: I just want to add one more thing which is that neither of us are scholars and I think both of us have enough experience answering questions and talking to other people that we can pool our knowledge together and say, “You know, this sounds like a good answer.” But, if you’re really looking for a fiqh opinion, it probably would be better to talk to somebody else.
Owaiz Dadabhoy: Absolutely. What we want to do is we want to get a discussion going so you’re actually asking the questions about zakat, right? We’re not the final answer, here, we’re just having this conversation today. So, that’s very useful information. Now, you know, a question comes up. “Well... I have money in a retirement account. I have a million dollars in a 401(k) or I have $400,000 in a traditional IRA. And I don’t have access to that money. I’m 50 years old or I’m 42 years old. So, I don’t have access to it. How am I going to pay it? I don’t have the kind of wealth in my checking and savings account to pay that? Or I do and I don’t want to use it because I was going to use that for something else.” Whatever the thoughts, people come up, so how do we do that? I know there’s a number of different opinions out there from scholars in the United States. So, how do you come up with the answer on that?
Monem Salam: Yeah, so again, all I can probably do is give you the different answers that are out there. I think the majority of the scholars will tell you that you do owe money on your 401(k) assets or your qualified account assets. Right? You might find some that say no, but the majority of them will say yes, you do. But in that yes, there are differences of opinion, as well. And what they all boil down to is number one: how much of the money do you control? And then number two is how much money are you able to take out from the account itself? So, let’s talk about control first. On the control side of it, you have to have 100% control of the money before zakat is due. And particularly what I’m talking about is vested versus unvested part of your 401(k). So, on the unvested portion, there is never going to be zakat because that’s not your money yet.
Owaiz Dadabhoy: When you say unvested, just so everyone understands, that means if your employer is matching but you don’t own that matching yet because you haven’t worked there a certain number of years, that’s what you’re talking about with vested versus unvested.
Monem Salam: Thanks for the clarification. That’s correct. And so, whatever portion you own is called vested. Again, you’re going to pay on the vested portion, but, you know, when you eventually take the money out of your 401(k), you are going to owe taxes on it and then prior to that, if you take money out prior to your retirement or for some other reason, some few reasons, you also owe a 10% penalty. Okay? So, what some scholars say is, “Well, you know, if you wanted to pay zakat on the 401(k) there would be a penalty, so let’s minus 10% off the value of your vested 401(k) and then only calculate zakat on that portion of it. Some people go further and say, “Yes, there’s a penalty but there’s also taxes and we should do it minus the penalties and minus the taxes and then calculate the zakat on it.” Now, each of these, I will say this, and again, it’s better to be able to talk to somebody in regard to this, but the idea of... let’s take the 10% first. I’m taking a very conservative opinion that it’s better to pay than come back later to Allah, subhana wa ta’ala [God, glorified is he] and say, “I forgot,” or, “I did the calculation wrong.” If the IRS is unforgiving about it, then what’s going to happen? So, the 10% part of it, you don’t have to take it out of the 401(k). As you were mentioning, you can take it out of your cash flow. You can either... if you have a savings account or checking account, you can take it from there, right? And then it gets more difficult as the account balances go higher and higher, definitely. But the second way you can do it... there’s nothing that says that zakat all has to be done at once, all during Ramadan. You can actually, let’s say, calculate in Ramadan... you make your intention to pay in Ramadan... but then, spread it out over a 12-month period because that’s the only way you can afford to do it out of your cash flow. So, that’s one part of it. The other part of it which is on the taxes part of it... I think the one thing you want to keep in mind is that if you want to deduct from a zakat amount, please do keep in mind a couple of things. One is that you’re getting a benefit when you put the money in. So, for example, if you put in $10,000 into your 401(k), yes when you take it out, it’s only going to be, let’s say if you’re in the 25% bracket, $7,500. But when you put it in, you save that 25% when you put the money in. So that’s one aspect of it. The second aspect of it is what tax rate do you use? Do you use your current tax rate or do you use your future tax rate and what is that future tax rate? All of these things come into play when you’re doing that. So, it’s much more complicated. Not that it’s impossible but it’s complicated. So, in my opinion, I think it’s much easier, I do it the same way, is just to do it on all of it because it’s simpler... whatever you pay extra on that becomes Sadaqa and Allah subhana wa ta’ala will reward you.
Owaiz Dadabhoy: You’re being more conservative that way in taking the “just in case” model. Don’t want to pick the wrong thing just because I decided to pick one from a list of different options, so let me pick the one that makes sense to you, which happens to be the most conservative one. So yeah, if you have, for example, if you have a retirement account with $100,000 in there and let’s say there’s no gain the next year. Right? So, it’s $100,000 the next year as well in Ramadan. You subtracted out the penalty in the taxes, you might have subtracted out $30,000 or $35,000 two years in a row. Like, you’re doing it on the same amount of money two years in a row. The other thing is there is a minority opinion out there that you don’t have to pay at all because the money is not accessible to you completely. It is accessible, of course, you have to pay a tax penalty, but they’ll say, “Since there’s a penalty it’s not fully accessible to you,” so their opinion is you don’t have to pay zakat on that. There’s a local scholar in the area and we talk about this and we say there are tax shelters and if you do that with your 401(k) you’re also making it a zakat shelter, right? You’re sheltering your money away from giving it to those in need because you put it into a 401(k). People can start to use that strategy and say, “Let me put as much away as I can in these qualified accounts, so I don’t have to pay zakat.” There’s going to be a portion of people that do that. So, definitely reach out to people that you might know. Take a class on zakat. But take maybe more than one. This is an important topic. It’s one of the five pillars of Islam. So, you know, it definitely takes us doing more. Another personal thing I’ll mention to everyone is that, you know, many years ago, I decided to get a spreadsheet—Excel spreadsheet—and put in every donation that I make. Sadaqa, zakat, and luckily, I did that because I would look at the balance is what... let me list on that spreadsheet on the bottom how much my 401(k) has, how much this has, everything, and then I calculate the percentage and throughout the year, then, I’m just trying to hit that number that I need to pay. You can go back and look, as well, when you’re doing your taxes and say, “Hey did I get a donation receipt for all of those donations I made so I can input those into my tax filing?” So, it helps you there as well but really, it gives you peace of mind that you paid the right amount of zakat, because you don’t want to owe that piece. It’s kind of like, you know, if you couldn’t make a prayer, you couldn’t pray Fajr in the morning. You had to make that up. It’s the same thing with zakat. If you have not paid that in the past, it is an obligation, so take it as seriously as you do with other things.
Monem Salam: True. And there are two things I want to mention. And some people might argue, “It’s so complicated. I have to spend a lot of time on it.” Yes, it is, but so is the IRS when you file your taxes with the IRS. There are rules, exceptions, and different things. But there’s a difference between calculating your zakat and calculating taxes. And that is the time and energy you spend on calculating zakat is an ibadah for you. And you’re going to get rewarded for it. So, take the time, think of it as an ibadah and just make the best decision that you can. The second thing that I want to mention is, you know, yes, the large balance is there and as we talk about often, Owaiz, every year the market does not go up. So, if you’re using our methodology of 10%, even in those years that you have a loss, take some money and give away zakat so that when you have a larger gain the following year, two years from now, whatever it is, you have already paid some zakat in advance to be able to kind of offset that as well. That might be another way to be able to look at how to pay off large balances.
Owaiz Dadabhoy: Yeah. My understanding is that you can prepay zakat for a future year as well. So, just keep those numbers in hand and that will make you even to the standard you’re supposed to get to. Haitham did put a link on the chat about the zakat brochure and application. You can sign up to receive the calculation if you’d like. It’ll be at the beginning of next year, we’ll give it to you. So, it’ll be sometime around February, we’ll send you your individual list of accounts, how much went into each account and how much the zakat due would be at 10.3% for the full calendar year. And then, you can choose to use that or you can use your 2.5% using those same numbers, if you wanted to. Or you can wait until Ramadan and calculate 2.5% on the value of your accounts at that time. So, you can use this is as another sample of how to calculate zakat. It’s an easy form to fill out. You can also take a look on that link, it just tells you exactly what Monem was talking about. What is the formula? So, if you’re more interested in this and you want to learn more about this. Do you talk about this in your book, as well?
Monem Salam: Yes, we do. We do talk about the different calculations. Not as comprehensive because the book is an overall perspective, but there is a section in there regarding zakat as well.
Owaiz Dadabhoy: Muslim Guide to Investing and Personal Finance. People can do that. I know we were giving those books out for a while, and we might do that again. We were doing that on some of these webinars, as well. When people, whoever was on, when we first started, we said, “We’ll mail you a book.” Once we get some more books, we might do that on a future webinar as well. Let’s quickly move to purification. I’m calling it further purification because zakat is also a form of purification of your money and your assets. So, tell us about what Amana Mutual Funds is doing with this further purification of your money.
Monem Salam: One thing to keep in mind is zakat is something that’s obligatory. It’s an ibadah. Those types of things. Now, we are going to get into a section which is more regarding tawbah as a repentance purification rather than an act which is an ibadah. Okay? So, we’re shifting the focus from there. As I mentioned to you earlier, when we are looking at companies that we are investing in, there are going to be some either revenue, assets, those types of things, that are from a haram source. We are limiting it to a low number but that doesn’t mean it doesn’t exist, so we do have that. So, what the scholars have said is that portion of the revenues or the income which is coming from a haram source needs to be purified. Now, there are conditions there and we can get into that, but the overall general idea is that portion of it just needs to be purified and that purification is because you invested in something that’s haram, that giving away of a portion of it is more like a tawbah, it’s a repentance that you’re doing for being involved in something that you should not have been.
Owaiz Dadabhoy: And so, what is... how is Amana Mutual Funds calculating this purification?
Monem Salam: Sure. So, let’s kind of look at it from a historical basis. So, initially, you know, the Amana Funds, we do have an expense ratio. And so, what we always felt was... because we are trying to limit all of this exposure that we have to haram, the actual number of what you need to purify is typically going to be very, very small. Okay? And so, the scholars of our Shariah board had mentioned to us that as long as the purification is lower than the expense ratio, then you can consider that part of your purification and you don’t have to do anything more.
Owaiz Dadabhoy: Okay.
Monem Salam: So, that is an opinion. However, we were getting some demand from our shareholders, saying, “yes, that might be the case, but we would also still like to know what that amount is.” And so, what we did was we came up with a way for us to be able to calculate the purification number and then be able to publish it on our website and I think Haitham just put up the link for it. Basically, what happens is you input the number of shares. We are the ones who calculate the per-share value of the purification and then if you multiply those together, you get an amount that you need to purify. Now, there are some overall rules, if you don’t mind, I’m going to get into that now, Owaiz. And that is... what part do you purify? And the scholars, from my understanding, pretty much all across the board are of the opinion that you purify on dividends, but you do not purify on capital gains. Whether realized or unrealized. And I’ll get into that a little bit. So, when you look at dividends. Let’s supposing a company pays 32 cents in dividends, and we know, for example, that 1% of their revenues are coming from a haram source. So, you can easily translate back and say 32 cents... 1% haram... 1% of 32 cents is x amount and that’s how much we need to purify. And it’s a direct relationship. It goes straight to the bottom line of the account statement, and you can pay it out. Capital gains is a little bit trickier. Because you are trying to find that exact source, what the scholars said is, “Why is this stock going up? Is it going up because of value in revenue of the haram sources that are increasing? Is it just sentiment of the investors? Is it some acquisition that they’re making?” Really, no, you can’t pinpoint why the stock is rising in value. So, that’s why, because you cannot attribute the number to capital gains, the majority of the scholars have said you don’t have to purify on capital gains but only on the dividend side of it.
Owaiz Dadabhoy: Got it. Got it. Okay. I think that’s an easy way to do this, on the website. I’ve used it myself. You just put in the total number of shares that you own, and it tells you how much you owe. It’s actually a very small amount. Why is it so small? The purification? I get that question, too. Why is the number so small? Is this really accurate?
Monem Salam: The reason why it’s so small is because we are trying to limit the exposure. You don’t want it to be very big because that would mean we are doing more haram that you have to purify. So, the smaller the number is, the better job we are doing in managing the money according to Islamic guidelines. Again, that number... except for one fund, that’s a trick fund for you, Owaiz, except for one fund that number will always be greater than zero. But which is the fund which is always going to be zero and we don’t even put it on the calculator on our website?
Owaiz Dadabhoy: It’s the only non-stock mutual fund that we have. The Participation Fund. Which invests in sukuk.
Monem Salam: And the reason why we don’t have to purify that is because the instruments that we are buying are already 100% halal. So, there’s no purification involved. So, there’s nothing to purify on that. You can do that on the three equity funds.
Owaiz Dadabhoy: Okay. And then, the numbers there are not going to be static, so for example, you put in that you have 100 shares today and then you come back to that website three years from now to put in 100 shares, that number is going to be different because we reset the calculation on the fiscal year, and I believe that’s May 31.
Monem Salam: Correct.
Owaiz Dadabhoy: Very good. Do you have anything else on purification?
Monem Salam: The only thing I would say is it does take us probably until August to come up with the number and the reason is because we want to base the number off of audited financial statements, not just off of unaudited, so you know, we go through the audit process, we do all of those things, and then we publish the number, you know. So, there is a lag time. It’s not like June 1st you have a number. But I think you’ll find that it’s a very tool to use on our website and I encourage people to take a look at it.
Owaiz Dadabhoy: And by the way, the numbers are not going to change too often or too much, I should say. Even when they do change once a year, the reason is that we don’t make a lot of changes. We don’t make wholesale changes in our different funds. So, we’re not selling 30% of our holdings every year and buying 30% new holdings. Right? We are pretty much keeping those companies that we believe still have more ability to increase in value and they are still Shariah compliant. And we might add some things here and there. We might chop off a little bit here and there. It’s not going to change vastly.
Monem Salam: Correct.
Owaiz Dadabhoy: That’s something for people to keep in mind, as well. And it is a further purification. So, you have the zakat purification. You have the scholars telling you that it’s okay to use these standards, and then we’re saying even with all of that, we are going to further purify by figuring out how much haram revenue there might be from dividends being paid and then you can make that payment. So, is that Sadaqa or zakat you’re giving when you’re purifying?
Monem Salam: That’s a good question. Two things the scholars have said: one is that you cannot consider it Sadaqa or zakat if it has to be the tawbah. And what that means is there’s no benefit that you can derive from it. So, what that means is you can’t take a tax write-off on it. You can’t take a tax write-off on it. The other thing that is said is you should be spending that money on the general good rather than on individuals. So, you cannot, for example, feed a fasting person with this money. But a general good would be, for example, a water well that everybody can benefit from. Or a bridge. So, those types of general use items you can use as tawbah money on, but you cannot use it on individuals, and you cannot take a tax write-off with it.
Owaiz Dadabhoy: And again, the number is quite small. Just because of what we all talked about. So, fortunately, it’s not a huge amount, unless you have thousands and thousands of shares, which might be the case for some of our clients. We do the calculations if you hold the accounts with us directly. If you hold them somewhere else, we can’t see the ins and outs, so you can use the calculation from our website. The link is in the chat group as we mentioned so feel free to go into your account that you’re holding somewhere else. For example, there are many people on the call today that might have a different employer. And you know, the employer might be a tech company or a hospital or attorney’s office or something. And so, they allow you to purchase the Amana Mutual Funds through a brokerage account. So, if they do that, you might have shares there that you can just figure out how many shares you have and come purify it. If you want to figure out the zakat, you can also, you know, use our methodology. The 10% number, or you can use the 2.5% number. Alright, so does that bring up anything else that you want to close out with, and then we’ll ask for final questions.
Monem Salam: No, I mean, I think the most important part of it is, you know, that it’s important to remember that the differences of opinion you have, whether it be in zakat or even on Islamic investing criteria... first of all, it’s not a fundamental difference, it’s actually... when somebody says, “Well I have to pay a zakat on my valuation.” Well, the difference is in how do you value? It’s not on whether or not you have to pay on the valuation. That’s one thing to keep in mind. And the same thing goes for the Islamic criteria side. The differences of opinion are on the margins. They’re not on the core fundamentals of it. There’s one more thing that I wanted to add. I think we have some time. I’ll make this really quick, and I think this is quite innovative on our part. What we are trying to do is we are trying to incorporate our environmental, social, and governance screens into our Islamic criteria. If you look at the criteria we have now, the Islamic one... they’re more negative based. We don’t do this. We don’t do this. We don’t do this. But on the positive side, on the ESG side, what we are trying to do is, you know, try to invest in companies that are being more efficient with their water... are being able to reduce their greenhouse gas emissions on the environmental side, taking care of their employees on the social side, and then having good governance practices on the governance side. And a lot of these have a rooting, a fundamental rooting, within our tradition. So, for example, if you want to talk about water usage and recycling, one time one of the companions was making wudu and the Prophet said, “Don’t waste water.” And the companion responded, “Can there be wastage even in wudu?” He said, “There would be wastage even if you were making wudu at a river.” And so, again, those types of hadith you can look at and be able to come up with those. So, traditionally we’ve done the forbidding the evil and with the ESG criteria we have added the enjoining in the good.
Owaiz Dadabhoy: I think that’s actually a good place to end. If people have further questions and you know, there was something that they missed, please ask that question to me. I’d be happy to answer. There’s a question here, do you have any advice for those whose employer provide a 401(k) for their employees but which has very limited investment options? Do you know of any religious exemptions? So, what you could do... the first step is to go to your employer and ask them to start up a brokerage account. And half of the 401(k)s in America have a brokerage account already. If they don’t have one, they can easily add a brokerage account, and then you can buy multiple things. Individual stocks, Amana Mutual Funds, what have you. I’ll give a quick example. Some of the technology companies, they have large Muslim groups, and it took two years plus for those companies to say, “Alright, we will go ahead and give you a brokerage account so you can buy the Amana Funds, or what you want to buy,” but there was a doctor that came to me. He is part of a six-hospital group in New York. He came to me in December, and he asked me this question that Justin is asking here. And I told him this is what you can do, to add a brokerage account, call your employer, and within a month he called me back and he said, “Hey they did that, now how do I buy the Funds?” So, sometimes it takes very long, sometimes they listen, and they do it like that. So, imagine the good that that person initiated, because all of the employees later on—the existing ones and the ones that come in the future — they will be able to buy something is according to their faith principles. I hope that answers the question and again, further questions, please email me and I’d be happy to direct you to the right place or if I can, I’ll answer the questions. One of the things I would like to solicit from you all is to let us know what else you’d like to talk about. So, whether it’s this webinar, because this really is for all of you, right, we give out this information then we house it on the website. Let us know. And then there’s the Halal Money Matters podcast that Monem hosts with Christopher Patton and if you have some thoughts on what we could do there as well. Something that you always wanted to learn about or get deeper into on Islamic finance or investing or, you know, we did one that was like one of the best viewed ones of the webinars, and that was estate planning, living trusts, will and preparation for the inevitable as we call it. So, that one was one of the most viewed. It’s on our website. We do thank you. And Monem, we thank you, for being on.
Monem Salam: My pleasure.
Owaiz Dadabhoy: I thank Haitham and Rachel for assisting today and then we thank all of our shareowners for being on and for staying on the whole way through. We value you being on, asking those questions, giving us feedback, and we get feedback, our team gets feedback throughout the year from our clients, and we go into detail with them. We would love to do that with you, as well. Please spread the word about Islamic investing is compared to the alternative, because we need to clean up our money as well in this life and then with the wills and trusts we need to clean that up and do the right thing for our afterlife, as well. Final things, somebody asked about Monem’s book. It is called Muslim’s Guide to Investing and Personal Finance. Maybe at a future webinar we will have some for those that join on time. We thank you very much and as-salamu alaykum.
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