Provident Funds

CategoriesTrade, Business & All Things Money [490]

Fatwa ID: 01582

Answered by Mufti Mohammed Tosir Miah

Question:

Under the law of our country, all government and armed forces employees are subject to deposit a portion of their salary on monthly basis in Provident Fund Account.  In turn, an interest of fixed or a varying rate is added in each employee’s account. On retirement, the employee gets his principal amount with interest.  In some cases, lower limits for monthly deductions are fixed while no upper limit of deductions exists:

a.                  Is interest on provident fund allowed?

b.                  If this interest is not allowed, how can an employee get exemption on forced monthly deductions?

c.                  If an employee wants to be safe and does not get interest on provident fund, how this interest should be accounted for and spent. A regards his principle amount, its value is reduced due to the currency de valuation. How can devaluation be catered

Answer:

Bismillah

In the name of Allah, the most Beneficent, the most Merciful.

The main difference between a pension and provident fund is the following:

  • Under a pension fund at least two-thirds of the final benefit must be paid as a pension for the rest of the pensioner's life. A maximum of one-third of the final benefit may be taken as cash.
  • Under a provident fund, the full amount of the benefit available at retirement may be taken as a lump sum cash payment, irrespective of whether the benefit is calculated on a defined benefit or a defined contribution basis. (http://www.pension.co.za/prod5.asp)  

The ruling of a provident fund in Islam is same as that of a pension fund.

The pension scheme might work in the following two ways:

  1. The government or the employers by law deduct a certain amount from the employee’s salary every month or year etc…                                           This would not be considered as riba (interest). It is not a form of insurance where premiums are paid and nor there is an element of gambling or interest involved here.                                                                                                           Furthermore, in Shariah legal ownership is not established until the individual or a representative does not claim the possession.                                                   Hence, when a percentage is cut from the wages of this individual without prior permission possession will not be established; therefore, the pension received will be considered as a gift or a bonus.                                                                                                                                                                                However, the problem here is that the money may be invested by the government or the employer to unlawful businesses like banks, alcohol companies, insurance companies etc… If they invest money into banks or alcohol Companies, then although it will be permissible to take the money as the employee did not have a say or any control of the money, it will be preferred to donate it to the poor without the intention of thawaab (reward). (Raddul-Muhtar p.553 v.9)
  2. The second possible situation is where the employee undertakes the scheme voluntarily. Mufti Shafee raḥimahullāh (may Allāh have mercy upon him) has written in Nawadir Fiqh, that one should refrain from voluntary pension schemes as these are similarities with riba. (Nawadir Fiqh p.325 v.1)                                                          

Only Allah Knows Best

Mohammed Tosir Miah

Darul Ifta Birmingham

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