Providence funds and retirement accounts : providence fund

Fatawa Question

[Question one] : I and my Fiancé have a few questions involving Riba and hope that you can help. 1) In our country, a portion of our monthly salary is deducted to be put into the central provident fund which does accumulate an annual interest of 2.5 % (This deduction and accumulation of interest is compulsory for all persons legally employed in the country earning more than $ 500 and the funds collected are invested by the government. The investment are done without us having any power over where or how it is done.). Our money which has been set aside in this fund can be used for purchasing our homes and paying for our medical bills. Thus my questions are as follows. A. Will we be responsible for this accumulation of interest and be considered to have sinned in regards to the laws of Riba ? NO, you are not committing a sin by working in this country and it is not you who is dealing in Riba, it is the providence fund management. This deduction represents a saving to you for old age, it is not a bad idea at all, rather it is an idea that Shari’ah encourages. The government regulates and uses this savings in a way that is not Shari’ah compliant, this is not your sin. If the government credits to your account the actual profit from using these savings and the use is not in Haram area (say in construction of residences) while it guaranteed minimum of 2.5 %, it is permissible to take these additives along with the principal amount deducted from your salaries. But if the government takes it from you and just gives you 2.5 % interest considering it a loan to the government, this interest is Haram to use for your own objectives. Rather you must take it and give it to Muslim charity or poor and needy Muslim persons. Same if the government gives you actual profit but it uses the money in Haram ways like lending it to banks. B. Should we one day utilize this fund money to purchase our homes or pay for our medical bills, will we also be considered to have taken part in the dealings with Riba ? When you use to buy a house or for medical bills, use only the accumulated deduction and any Halal addition. This is why you should keep an account (I think the fund usually send you statement to that effect) of the principal and the interest, any amount you withdraw above the principal should be given to Muslim charity. c. We analyzed that the only way we can truly escape Riba is to move to another country where we will be separated with our families. Should we go to such extremes ? There is no urge or need to leave your families. You may stay and accept the deduction and avoid interest by giving it to charity you are not the one who is earning it or asking for it. 2) Should we proceed to purchase a home with the money in the fund, and then in a few years’ time decide to sell the house, the amount of money which we have used from the fund will be deducted from the sale proceedings and put back into the fund including the accrued interest which would have been accumulated (These are all compulsory and the amount will be automatically transferred back into the funds account by the government upon completion of the house sale). Thus my question is as follows. A. Will we then be considered as a giver of Riba and be dealt with accordingly in the Islamic law pertaining to Riba ? If you buy a house and money should return to your account in the providence fund with interest charged to you to the benefit of your account in the fund. You need not worry about paying this interest because it is in fact not interest as you pay it from your pocket (or account in your bank) to another account (with the PF) that you own. In other words, it is from you to you. This cannot be interest as we know it that is prohibited in the Qur’an. What is prohibited is paid from one to another. This is equivalent to the government telling you : you can use the money you have in this account provided you save in the future to your own self a larger amount that the amount you took. This is permissible for the government to impose it on you and permissible for you to do. Finally, please remember that our beloved Prophet said that we are not responsible for what is imposed on us, whether by law or any other force. We hope that you can assist in clearing our doubts as we have spent a lot of time trying to find the answers to our questions and could find nothing that could help us. Thank you so much for your time. [Question Two] : Dear Sir Assalamu Alaykum and thank you so much for your prompt reply. In regards to my 1st (Q1a) question, can I further clarify so as to be sure ? 1) In our country, a portion of our monthly salary is deducted to be put into the central provident fund which does accumulate an annual interest of 2.5 % (This deduction and accumulation of interest is compulsory for all persons legally employed in the country earning more than $ 500 and the funds collected are invested by the government. The investment are done without us having any power over where or how it is done.). Our money which has been set aside in this fund can be used for purchasing our homes and paying for our medical bills. Thus my questions are as follows. A. Will we be responsible for this accumulation of interest and be considered to have sinned in regards to the laws of Riba ? NO, you are not committing a sin by working in this country and it is not you who is dealing in Riba, it is the providence fund management. This deduction represents a saving to you for old age, it is not a bad idea at all, rather it is an idea that Shari’ah encourages. The government regulates and uses this savings in a way that is not Shari’ah compliant, this is not your sin. If the government credits to your account the actual profit from using these savings and the use is not in Haram area (say in construction of residences) while it guaranteed minimum of 2.5 %, it is permissible to take these additives along with the principal amount deducted from your salaries. But if the government takes it from you and just gives you 2.5 % interest considering it a loan to the government, this interest is Haram to use for your own objectives. Rather you must take it and give it to Muslim charity or poor and needy Muslim persons. Same if the government gives you actual profit but it uses the money in Haram ways like lending it to banks. In regards to the section in green, I would like to confirm that we are guaranteed a minimum 2.5 % interest on top of our principle sum (e.g. The government invest and earn 10 % and return a minimum 2.5 % to us in the form of 'interest' to the provident fund account. Thus in the case the term 'profit' and 'interest' could be used quite confusingly). We are not entirely sure in what way the government uses our money in the funds. Thus we also are not sure / informed if they are using it in Haram areas or otherwise. -You mentioned that in this case it is permissible to take these additives (meaning the interest portion ?). Does this mean, that we will be allowed to use these additives as well when we decide to buy a house? Or must we give these additives to charity ? -In this case, as we are unsure of how they make use of the funds (Haram or otherwise), is it still permissible for us to take the additives ? I would like to thank you once again for taking time to help us clarify our doubts. May Allah SWT bless you for all the help that you have rendered to us and beyond ? Regards, [Question three] : The CPF system in Singapore works as per point 2 from your previous email. Its acts like a savings system and does not base its given amounts in accordance to the individual's circumstances or situations. All given amounts are based on the deductions of the individual salary and interest given only. The explanation that has been given to us as to how the money in the fund are being used has been quite controversial as what you can see from the article link I have forwarded previously. The main explanation given to us is that the CPF board loans the government the monies in the fund in return for a fixed interest rate of a minimum 2.5 % to its account holders. Thus even if the government were to make a loss in their investments, the 2.5 % minimum still applies. In this case, can I safely say that we will need to take this portion of interest and give them to charity before we can utilize our money in the fund to purchase a house ? Thank you. Regards, Dee

Fatwa

Click hereto view more

Publication Date

2010-12-11

Main Subjects

Financial and Accounting Sciences
Islamic Studies

Topics

• Islamic jurisprudence
• Savings

No. of Pages

5

Data Type

Fatawa

Language

English

Record ID

BIM-729974

• APA
• MLA
• AMA