Is it Permissible to Invest in a Shari‘a Non-Compliant Retirement Fund?

Answered by Shaykh Muhammad Carr

Question

My employer’s retirement plan offers only Shari‘a non-compliant funds. Is it permissible to participate to receive the employer match while investing in the least non-compliant option available and purifying any dividends received?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

Thank you for your question.

Viewed as a fund akin to a waqf, participation in the retirement plan is permissible. This characterization is best suited for you. Viewed as a direct investment, it is not permissible as a matter of strict ruling (azima), but is permitted as a concession (rukhsa).

Characterization of the Retirement Fund

Scholars are sharply divided over how retirement plans should be characterized. Where a retirement fund is regarded as a legal entity with a distinct juristic personality, payments received from it are deemed permissible, even where the fund derives income from impermissible sources.

This position is supported by the established principle permitting dealings with a person whose wealth is largely of impermissible origin. Imam al-Suyuti states that dealing with such a person, where the impermissible portion is not specifically identified, is not considered impermissible according to the most reliable opinions. [Suyuti, al-Ashbah wa al-Nazai’r]

Where the retirement fund is characterized as a direct investment, however, voluntary participation in a shari’a non-compliant fund is not permissible. Under this construct, one is directly investing in an unlawful enterprise, and any earnings generated therefrom are equally impermissible. [Haytami, Tuhfat al-Muhtaj]

The investment is either compliant or non-compliant. Purifying dividends is of no consequence when the underlying investment is void from the outset.

The Concession for Necessity

In the absence of a permissible alternative, a person may participate in an otherwise impermissible retirement plan when it is characterized as a direct investment. This is based on the maxim: “Necessity renders the prohibited permissible.” [Suyuti, al-Ashbah wa al-Naza’ir]

Imam Suyuti further states: “Where the impermissible (haram) pervades a country such that the permissible (halal) is difficult to obtain, it is permissible to avail oneself of what is needed. The dispensation is not confined to cases of strict necessity.” [ibid.] The employer match forfeiture is a further factor supporting the concession.

Allah says, “So whoever is compelled (by necessity), without desiring or exceeding what is needed, then Allah is truly all-forgiving, all compassionate.” [Quran, 16:115]

Aspirations and the Spirit of Striving

You may adopt the views espoused above without compunction. However, as Muslims, we should always strive for what is highest and most pleasing to Allah. It is this very spirit of striving that gave rise to Islamic Finance as a discipline.

High aspirations are an indispensable character trait of the believer. Low aspirations require repentance. [Khadim, Matharat al-Qulub]

And Allah knows best.

[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Related Answers

• Is It Permissible to Accept a Non-Sharia-Compliant Fund from an Employer? — Guidance on receiving funds from a non-compliant employer retirement plan, including the precautionary measure of donating a portion to charity upon taking ownership.
• Are Retirement Annuities Permissible? — An explanation of why conventional annuities are not Sharia-compliant from a fiqh perspective, and what this means for Muslims planning for retirement.
• Accepting a Non-Shariah-Compliant Fund from Parents — Guidance on taking ownership of a non-compliant investment fund opened by others, with a practical approach to purification before reinvesting the funds.

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from the guidance of many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.