Provident Fund For Employees

Our Darul Ifta does not approve the implementing of conventional provident funds in one’s business due to the element of Riba (interest), nor can we comment on any of the alternate retirement annuities being offered by unconventionally driven firms due to us being unapprised regarding their processes.

Muslim Employees:

1)    We have reached a conclusion that the best way to go about implementing a benefits program for your Muslim employees which will conform to Shari’ah standards would be as follows:

   ®          Firstly, in undertaking this venture, it would be advisable to avoid third party influence at every step which means that you would have to go about the entire process without the brokering of any associate or assistant outside your company. In this way, you will be reassuring the purity and legitimacy of your monetary dealings.

   ®         An investment scheme should be set up in which you would be going into a Muḍārabah contract (silent partnership) with the employee. The employee would be the silent partner, while you as the employer, will be doing all the administrative and related work. The investment should be in any Halaal business venture which will have to be personally administered by yourself. These could include buying and selling of gold or silver, land purchase and development, real estate, cattle schemes etc. The nature of the investment choice would obviously be determined by the amount that the employee is willing to invest monthly. 

   ®    Your employee will be a sleeping partner in this partnership (towards which you as the employer would also make a monthly contribution in the business venture). However, the employee will have to hand over all administrative responsibilities to you. This will result in a Muḍārabah contract that will incorporate an aspect of Shirkah as well. The Muḍārabah aspect (which is the dominant component) is on the basis that the employee would be the silent partner who is investing a sum of capital and the Shirkah aspect would be on the basis that you as the employer are also making a contribution towards the investment. In a Muḍārabah contract, if the financer/investor grants permission to the working partner to incorporate his capital with the working partner’s funds, then this results in a Shirkah also coming into effect. In spite of this (due to monthly contributions being equal from both sides), the majority of the returns accrued can be allotted to the employee (considering that this is an employee’s benefit program). The returns do not have to be equal, even though the monthly contribution of each partner is equal. 

   ®         An agreement will have to be signed stating that the partnership will terminate upon the termination of employment and that the returns of the investment will be a specified (pre-agreed) percentage of the profits and not of the capital, nor of the net worth of the investment. 

   ®         The returns will be paid out as a lump sum upon the termination of employment. In the event of death being the cause of the dissolution of employment, the returns will be paid to the estate of the employee. 

   ®         The agreement will have to emphatically state that if the investment dwindles then the employee would have to be bear the risk as well; considering that he is a partner of the investment. The losses, unlike the returns, will be pro rata of the capital input of each partner. Bearing in mind the spirit of co-operation, the prime investor (you) should however, be willing to pay out the employee on the loss of his capital as a kind gesture.

Non-Muslim Employees:

2)   Considering that the above-mentioned scheme may not be of interest to non-Muslim staff, an offer should be made to them that they independently take out individual retirement annuities with a broker of their choice (without you being involved in choosing a retirement annuity broker or even depositing contributions directly into the retirement annuity fund). A percentage of the monthly amount to be deposited into this fund will be supplemented to their salaries. In this way they will be saved from the extra trouble of moving funds to a different retirement annuity in the case of their employment termination from your business. The same can be adopted if you are approached to take out a medical insurance for your staff whereby you only supplement them the amount needed to be administered to the medical aid company (and they will take out the medical-aid with a broker of their choice). This amount will not be subtracted from their salaries nor yearly bonuses, rather it will be treated as a Tabarru’ (gift or donation) to your staff and can be given with the intention of Sadaqah. This method will be costly but may help you circumvent worker union issues.

3)    Alternatively, a fund can be set up through an unconventional firm, but you will have to emphatically state and ensure that the fund must operate by investing in Shari’ah-compliant business ventures only.