Can I Keep Capital Gains From Stocks That Turn Haram?

Answered by Shaykh Muhammad Carr

Question

Calculating purification for dividends is relatively straightforward, based on a company’s current activities. In contrast, capital gains are more complex, since they depend on a company’s future activities.

Consider this scenario: I purchase a share for $10, and its price rises to $50.

1. Suppose the stock was originally halal (fully Shari‘a-compliant), but the price surge occurred because the company announced that it had won a haram contract (e.g., a major deal with a riba-based bank). Am I permitted to keep the $40 profit, or should I donate it?
2. Conversely, what if I mistakenly invest in a company where 40% of its activities are haram (and thus non-compliant), but later the stock price jumps after the company announces an expansion into permissible activities, reducing its haram business to below 5%? In this case, may I keep the profit?

Answer

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

Thank you for your question.

A company’s Shari‘a compliance assessment is determined by the ratio of impermissible income to total assets, rather than by reference to market capitalization. Accordingly, provided that the company satisfies the quantitative threshold for non-permissible income relative to its total assets, the holding of its shares remains permissible, irrespective of fluctuations in the share’s market price.

This is the preferred standard and more stringent control, excluding companies with inflated market caps that artificially decrease the NPI.

Thus, if the capital gain reflects actual impermissible earnings, then it will have to be disposed of as NPI; otherwise, it resembles an increase in the price that you, as a seller, are entitled to.

Impermissible Income

For a company to be considered Sharia-compliant, its core business activities must adhere to Islamic law.

If the company generates no impermissible income, there is no need to apply NPI (Non-Permissible Income) filters, and the entire dividend can be distributed to shareholders without concern.

NPI should not exceed 5% of the company’s total revenue to remain within the Sharia universe. If the NPI surpasses this 5% threshold, the company is typically excluded from Sharia-compliant indices unless mitigating factors exist. [Mufti Ahmad, Senior Sharia Advisor, South Africa; See also AAOIFI]

General Rule of Impermissible Income

The general rule that applies to disposing of unlawful funds is as follows:

• Where the rightful owner is known, it must be returned to the rightful owner.
• Where the rightful owner is not known (or if they refuse), the funds must be disposed of in one of two ways: a) it must either be given towards a charitable cause that benefits the public at large, such as public hospitals, schools, or mosques; b) or it should be given in charity to a person who is entitled by his need to receive charity. [Nawawi, Majmu‘ Sharh al-Muhadhdhab; Karaan, Disposal of Riba (Fatwa issued by the MJC)]

I pray this is of benefit and that Allah guides us all.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

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 benefited from 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.