Question
Salaam brothers I’ve been wanting to invest some money into shares but I’m uncertain which companies I’m allowed to invest in. I know that I’m not allowed to invest in companies that indulge in haram acts such as banks and gambling companies. However I’ve been informed that companies that pay interest are also not allowed to be purchased but when I look into a company I come to notice that all of them have debt and on that debt they pay interest so am I allowed to purchase shares from such companies. In Sha Allah when you reply to this can you give me a very detailed answer in this topic so i get a full understanding jazakallah may Allah reward your efforts.
Answer
It is permissible to trade in shares provided the trading is done in a shari’ah compliant manner. In order for it to be shari’ah compliant the following factors must be taken into consideration:
The business must be lawful
Companies can be broken down into three categories:
- Companies which are 100% halal. These companies will not engage in any non-Islamic trading such as interest-based transactions. Hence, they will not borrow money on interest, will not receive interest on their deposits, will not have unlawful investments or any other unlawful earnings. It will be permissible to invest in this type of company though it may be difficult to find such a company on the market.
- Companies which engage in unlawful business. These are companies whose primary business is based on non-Islamic trading and business, such as trading in pork, alcohol production, betting and gambling, pornography, interest-based lending, conventional insurances and so on. It would not be permissible to trade in such a company’s shares.
- Companies whose primary business is permissible, but some of their business is not shari’ah compliant. For example, they may have borrowed some money on interest, or the primary business of the company maybe lawful but they receive a small percentage of interest on a savings account.
Contemporary scholars have differed regarding this last category. Some have adopted a more cautious approach and prohibited trading in their shares. The basis of this argument is that once a person purchases such shares, they become a shareholder in the company which means they are now connected with all the transactions that take place. Hence, if a company is engaging in some sort of interest-based transaction, the shareholder will also be part of that transaction.[1]
On the other hand, other contemporary scholars have stated that trading in such shares should be impermissible as mentioned above, however, if the company meets certain conditions to limit the non-shari’ah compliant activity, then those companies will be exempt from the prohibition, and it would be permissible to purchase their shares. This is provided that one does not benefit from the unlawful income and that the non-shari’ah compliant activity is minimal in comparison to the rest of the company’s activities.
A few reasons have been provided to support this argument. Firstly, in regards to the depositing of cash in interest providing banks, this is an independent act and will not impact the primary business of the company which is lawful and that is what is being invested in.
As for taking interest bearing loans this is without doubt unlawful and the one carrying out such transactions will be sinful. However, once they have taken the loan, that sum enters into their ownership, hence, transactions carried out with those sums will be lawful. It is down to the shareholder to oppose such practice in general meetings but if this is not successful then the shareholder will not be to blame.[2]
The conditions stipulated to limit the non-shari’ah compliant activity are as follows:
Ratio of interest-bearing debt
If the company has interest bearing debt, then this debt must be limited to a certain amount. There is a difference of opinion in regards to what this amount should be as it is a matter of legal interpretation (ijtihad) and not something found in primary sources. The following are the most common opinions:
- The total interest-bearing debt should not exceed 33% of the total assets of the company.[3]
- The debt should not be equal to or be more than 30% of the total assets.[4]
- The debt should not exceed 30% of the market capitalisation of the company.[5]
As this is a matter of legal interpretation one may act upon any of the above opinions. Adopting opinion three would seem to be the most cautious approach as the market capitalisation would change on a day-to-day basis whereas total assets will be taken from company reports which would typically be published quarterly. Hence, investing in the company may go from permissible to impermissible and vice versa quite frequently if market capitalisation is used. Also, this is the opinion adopted in the Shariah Standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) hence is based on collective ijtihad of senior scholars.
It must be stated that this principle does not mean that it is permissible for a company to take interest bearing loans up to 30% or 33% of the company’s assets, rather, these principles are related to buying shares in companies with already existing interest-bearing debt.
Ratio of cash and accounts receivables
In order for trading in shares to be permissible the company must own non-liquid assets. If the company only owns liquid assets, then the shares will be representing the liquid assets, hence, any trade which takes place would have to be at the exact value of the assets. Any increase or decrease would result in interest (riba).
Contemporary scholars have differed regarding the ratio of non-liquid to liquid assets. The most commonly stated opinions are that the non-liquid assets must be at least:
- 51% of the total assets. This is based on a juristic principle which considers majority as the entirety. Hence, if 51% of the assets are liquid then all the assets will be in the ruling of liquid assets. If 51% are non-liquid, then all the assets will be treated as non-liquid.
- 20% of the total assets. [6]
- 30% of the total assets.[7]
- 31% of the total assets.[8]
- 33% of the total assets.[9]
- The last view is based on the Hanafi school and states that if an asset is a combination of liquid and non-liquid assets it can be traded in, regardless of the ratio of non-liquid to liquid. This is provided two conditions are met. Firstly, the non-liquid cannot be a negligible amount, rather must be a considerable proportion. Secondly, the total price must be more than the value of the liquid portion to avoid interest (riba) taking place. For example, if a share of £100 represents £60 of cash and £40 worth of non-liquid assets then the share price must be at least £61. Hence, if the share price was £120, £60 will be in place of the £60 of cash and the remaining £60 will be in place of the £40 worth of assets. This second condition is mainly theoretical as it is highly unlikely that a share will be valued less than its liquid assets.[10]
Unlawful income
If the company has unlawful income, then this should not exceed 5% of the total revenue.[11]
As mentioned before ideally the company should not have any unlawful income. However, contemporary scholars have permitted buying shares in a company if the primary and majority income is lawful and no more than 5% is unlawful. However, one would need to purify their investment to ensure that they do not benefit from this unlawful income. In addition to this Mufti Taqi mentions that the share-holder must express their disapproval against such dealings, preferably by raising their voice against such activities in the annual general meeting of the company.[12]
Purification
There are two main ways in which shareholders will make profit and the method of purification will differ for each.
- Dividends. If the shareholder is receiving dividends, then they must dispose of the percentage of dividends which corresponds to the unlawful income by giving the money away in charity. For example, if 3% of the company’s income is unlawful then 3% of the dividends received must be given away.
- Capital gains. If the shareholder will benefit by the appreciation of the price of shares over time, then there are two opinions in regards to purification in such a case:
– Purification is still necessary as the market price reflects elements of interest in the assets of the company.
– Purification is not required if the share is sold even if the price has increased. This is because no amount can be fixed to reflect the interest. The amounts are small and thus considered negligible in comparison to the other assets of the company and the price of share is in comparison to the majority assets and not this small amount.[13]
The first position of purification still being required is more cautious, though the second is also a valid position.
Interest taking deposits
The total amount of interest taking deposits cannot exceed 30% of the market capitalisation of total equity.[14]
Contract for Difference (CFD)
CFD’s are not permissible. One does not own the underlying assets, rather they are just speculating on how the price will move. This will fall under the prohibition of gambling.
Lending shares
Lending shares has been deemed impermissible by various shari῾ah bodies including AAOIFI.[15] The reason for this is that lending is a homogenous transaction.[16] When something is loaned out, it is necessary for the exact same item (ʿayn) or an identical item (mithl) to be returned.[17] For example, if I give someone £100 to borrow, they can use up that sum but then must give me £100 in return. As for shares, they are considered non-fungibles and cannot be replaced by the same or identical item. This is because a share represents the assets within a company and when the share is returned at a later date the assets within the company may have changed. Hence, by giving the share back the borrower is not returning the exact same item which they borrowed. Rather, they would have to give the exact value they borrowed.
If an individual does not lend shares out themselves but they are aware that their broker lends out their shares and they agree to the terms and conditions, then it will be seen as the individual lending out the shares. This is because the broker acts as the individual’s agent and will be lending out the shares with their consent.
Shorting stocks
As for shorting stocks this is not permissible for various reasons. Firstly, the lender may charge the borrower for lending which will result in interest (riba) between the two parties. Secondly, the borrower is selling a share which they do not own which is also impermissible.[18]
Day Trading
It is necessary for the share to enter the shareholder’s ownership and possession before it can be sold on.[19] Hence, it would not be permissible to sell shares before delivery of the share.
[1] Fiqh al-Buyu’ 381
[2] Fiqh al-buyu’ 382
[3] http://alqalam.org.uk/research-papers/investment-in-stocks-and-shares/
[4] https://forum.islamicfinanceguru.com/t/fatwa-is-share-stock-trading-halal-can-you-invest-in-the-stock-market/16
[5] AAOIFI Shariah Standards page: 563
[6] IFG view, https://forum.islamicfinanceguru.com/t/fatwa-is-share-stock-trading-halal-can-you-invest-in-the-stock-market/16
[7] AAOIFI Shariah Standards page: 567
[8] Mufti Faraz Adam, https://forum.islamicfinanceguru.com/t/fatwa-is-share-stock-trading-halal-can-you-invest-in-the-stock-market/16
Mufti Zubair Butt, http://alqalam.org.uk/research-papers/investment-in-stocks-and-shares/
[9] Mufti Taqi, Introduction to Islamic Finance, page: 144
[10] Mufti Taqi, Introduction to Islamic Finance, page: 145
[11] http://alqalam.org.uk/research-papers/investment-in-stocks-and-shares/
Mufti Taqi, Introduction to Islamic Finance, page: 144
AAOIFI Shariah Standards page: 563
Mufti Faraz says 5% is also prohibited. The unlawful income must be 4% or less.
[12] Mufti Taqi, Introduction to Islamic Finance, page: 143
[13] Mufti Taqi, Introduction to Islamic Finance, page: 145
[14] AAOIFI Shariah Standards page: 563
Mufti Faraz divides by total assets as opposed to market capitalisation:
https://forum.islamicfinanceguru.com/t/fatwa-is-share-stock-trading-halal-can-you-invest-in-the-stock-market/16
[15] AAOIFI 566:
3/9 It is not permissible to lend shares of corporations
AAOIFI 574
The basis for the impermissibility of lending the shares of corporation is that the share at the time of repayment -in consideration of what it represents – does not represent the same thing that it did at the time of lending due to the constant change in the assets of the corporation.
[16] الدر المختار وحاشية ابن عابدين (رد المحتار) (5/ 161)
فصل في القرض (هو) لغة: ما تعطيه لتتقاضاه، وشرعا: ما تعطيه من مثلي لتتقاضاه وهو أخصر من قوله (عقد مخصوص) أي بلفظ القرض ونحوه (يرد على دفع مال) بمنزلة الجنس (مثلي) خرج القيمي (لآخر ليرد مثله) خرج نحو وديعة وهبة.
(وصح) القرض (في مثلي) هو كل ما يضمن بالمثل عند الاستهلاك (لا في غيره) من القيميات كحيوان وحطب وعقار وكل متفاوت لتعذر رد المثل
[17] The exact same asset in ῾ariyah and a similar asset in qard
[18] AAOIFI Page 565
3/6It is not permissible to sell shares that the seller does not own (short sale)…
Fiqh al-buyu 383
[19] Fiqh al-Buyu’ 383
Answered by:
Ifta Research Fellow
Checked & Approved by:
Mufti Abdul Rahman Mangera
Mufti Zubair Patel