A Screening Breach, a Thinly Traded Stock and a One-Month Divestment Order
Puan Salmah, 55, holds RM 750,000 in a Shariah-compliant equity fund and RM 120,000 of Serirama Holdings bought directly two years ago for RM 75,000. Last week the fund's Shariah adviser reported that Serirama has breached both thresholds: interest-bearing deposits are now 34% of total assets against a 33% limit, and interest income is 5.4% of revenue against a 5% limit. The adviser directed the fund to divest within one month. The fund's prospectus, however, allows up to three months for orderly disposal in illiquid names, and Serirama is thinly traded. The price has already fallen 12% since the breach, and a broker's note suggests waiting for the next quarterly results before selling. Serirama paid Salmah RM 6,000 of dividends during the year. She also holds RM 200,000 in a Shariah money market fund that reports 8% of assets in deposits with a conventional bank, described as 'pending conversion'. She is worried about locking in a loss and asks whether she must sell, and whether she must cleanse the RM 45,000 profit she would still make on her direct holding.
1. Quantify the purification on the RM 6,000 dividend and decide whether any part of the RM 45,000 gain is purified. Justify the basis you use.
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Purification is on income received from the impermissible source, not on the value of the asset and not on capital appreciation.
Dividend: the relevant ratio is the income ratio, 5.4%. 5.4% x RM 6,000 = RM 324. The 34% asset ratio tells you the company is non-compliant and triggers divestment; it is not the purification multiplier, because the deposits are a balance-sheet item, not part of the dividend received. Using 34% here would over-purify by nearly RM 1,700 and would effectively pay out the client's capital.
Gain: the RM 45,000 is a capital gain on sale, not income from interest. The mainstream contemporary position does not purify the capital gain where the stock was compliant when acquired and is disposed of promptly after the breach. The gain crystallises the market's valuation of the whole business, which is predominantly permissible. Two qualifications to record in the file: (i) some boards require purifying the impure component of earnings that accrued during the period of non-compliance, which here would be one quarter at 5.4% of the gain attributable to that quarter, a small figure; (ii) the fund's own purification policy governs the RM 750,000 fund holding, and she should follow the manager's published methodology rather than mixing methods across the two holdings.
Practical point: the RM 324 is sadaqah to the poor, not zakat, and is not deductible from any zakat she pays on the shares.
2. There is a conflict between the adviser's one-month divestment order and the prospectus's three-month window for illiquid names. What should you recommend, and how should it be documented?
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The Shariah adviser's directive governs the fund's compliance status. The three-month prospectus window is an outer legal limit for orderly disposal, not an entitlement to use the full period, and it does not override a narrower instruction from the fund's own Shariah authority. The broker's suggestion to wait for results is not a compliance argument; it is a market call, and acting on it would subordinate a binding religious ruling to a view about price.
Recommendation:
- The fund should begin selling immediately and complete as much as the market absorbs within the one month. A partial sale executed in good faith is better than a single block trade that moves the price against unitholders.
- If the one-month deadline cannot be met because of genuine illiquidity, the manager should not quietly overrun it. It should seek a documented extension from the Shariah adviser before the deadline, explaining volumes, bid-ask spread and the steps taken, and record the extension in the compliance file.
- Salmah's own RM 120,000 holding is separate. Her clock started when she learned of the breach, not when the fund's adviser published. She should dispose of it as soon as reasonably practicable within the customary grace period of about one month, and should not add to it in the meantime.
- Documentation: dated instruction, trade confirmations, the adviser's ruling, any extension request and reply. If this ever becomes a client complaint, the file will be judged on whether the process was prompt and reasoned, not on whether the price recovered.
On the loss: the 12% fall is a cost of compliance. It does not make compliance optional, and framing the decision as 'locking in a loss' frames it wrongly; the breach already changed what she owns.
3. What is the problem with the RM 200,000 money market fund holding 8% conventional bank deposits 'pending conversion', and what should she do?
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'Pending conversion' is a description of intent, not a compliance status. Two things follow.
First, the income. Interest earned on those deposits is riba, and her proportionate share must be purified and given away, not retained. 8% of RM 200,000 is RM 16,000 of exposure; if the fund earned, say, 3% on that portion over a year, her share of the impure income is small in ringgit terms but still must be cleansed, and the fund's manager should be able to state the exact figure from its purification report.
Second, the status of the fund itself. Temporary holdings of conventional deposits can be tolerated while an actual conversion is under way, but only within a disclosed transition period and normally subject to a limit. She should ask three questions in writing: what is the transition deadline, who imposed it, and what happens if it is missed? If the answer is that no deadline exists, the holding has become a permanent feature and the fund's Shariah-compliant label is questionable. In that case she should move the money to a fund whose compliance report shows a nil or within-tolerance conventional exposure.
Planning point: this is her liquidity reserve, and the redemption proceeds from the Serirama disposal will land in it. Check the destination fund's compliance report and purification policy before the money arrives, rather than after, so the reserve is not parked in a doubtful vehicle for the months when she most needs certainty.