Q.) Is it permissible to buy and sell stocks?
A.) A Muslim can acquire the shares of a joint stock company with the following conditions:
The main business of the company must be Halaal (permissible) according to Shariah. So, a Muslim cannot invest in a company whose main business is Haraam, like the traditional banks, insurance companies, companies dealing in wines, etc.
If the main business is Halaal, but it is involved in borrowing money on Interest or placing its funds in an Interest bearing account a Muslim share-holder should raise his voice against this practice in the annual general meeting of the company.
When a Muslim share-holder receives a dividend he must ascertain that proportion of the profit of the company which has accrued on its interest-bearing accounts. Then a similar proportion from his own dividend must be given by him to a person or persons entitled to receive Zakaat.
If all the assets of a company are in a liquid form and the company has not yet acquired any fixed assets or any stock for trade, then the sale and purchase of shares must be on their par value only.
If anyone of these conditions is contravened, the investment in a company is not permissible in the Shari’ah.
Question 1: Company A raises funds by selling shares and interest-bearing bonds and invests all funds in predominantly halal and profitable activities. Is it permissible for an individual to purchase shares of Company A ?
Answer 1: If Company A raises funds by issuing shares and interest bearing bonds and invests all funds in predominantly halal and profitable activities, the permissibility of purchasing shares of such a company depends on four conditions:
All the business activities of the company is halal.
The shares of such a company can only be purchased after it has acquired illiquid assets like machinery, buildings, raw materials or stock in trade.
If it becomes evident from the income statements of the company that a part of its income consists of interest given by the bank on its deposits, that proportion of the dividend must be given to charity. For example, if the total profit of the company is $100 and 5% of it has accrued through interest received on bank deposits, then that 5% must be given to charity.
The shareholder should express his disagreement over depositing surplus funds in an interest bearing account and raising funds through interest bearing loans. A preferable method would be to propose a ruling against such interest bearing transactions in the annual general meeting of the company.
If the four conditions are strictly fulfilled, it is hoped that purchasing shares of such a company will be permissible in Shari’ah.
An objection may be raised against this ruling because the company had raised a considerable amount of its funds by issuing interest bearing bonds, and therefore a substantial part of its funds would be impure according to Shari’ah. As such it would not be permissible to participate in any business.
This objection, however, may be refuted on the grounds that although taking an interest bearing loan is strictly prohibited in Shari’ah, the prohibition only affects the person responsible for taking the loans.
Although the person will be liable to punishment in the Hereafter for committing a sin, the amount borrowed however, is treated by the Shari’ah on its own. Hence, the money that is borrowed and anything purchased by that money is not in itself haram under Shari’ah. Therefore, if the capital raised by the company consists of some amounts borrowed on interest, it will not render the whole capital impure.
Questions 2: Company B raises all its funds by selling shares and invests all its funds by buying the shares of Company A (above) and other similar companies. Is it permissible for an individual to purchase shares of Company B?
Answer 2: If the four conditions mentioned above are fulfilled it will also be permissible to purchase the shares of Company B which has invested all its funds in the shares of Company A.
Question 3: Company X sells financial securities on which it promises dividends at a rate of 10% on its total sales during the year. Is it permissible to purchase these securities where dividends are paid as a predetermined proportion of sales revenue and not profits ?
Answer 3: It is necessary for the permissibility of musharakah that the profits of the joint venture are distributed among the partners at an agreed proportion of the actual profit and not in proportion to the sales revenue. Therefore, it is not permissible to purchase the securities issued by Company X
Justice Maulana Muhammad Taqi Usmani
Question: Could you please supply evidence on why trading in shares is halal? From my understanding, contract law in Islam forbids trading shares i.e. in a business contract, the individual needs to know who they are dealing with personally, whereas this is impossible when you trade in shares. Could you please elaborate on this issue and provide the daleel as well.
Answer: Investing in or buying on certain conditions is permissible according to the majority of Shari’ah scholars. There are, however a few scholars who do not allow this due to the reasons which you have mentioned. Trading shares is based on the contract of Shirkah or Musharakah (Partnership), where traditional scholars in the traditional books of fiqh have not mentioned that it is essential for the Musharakah contractor to know the shareholder or Sharik.
In addition to this, in some contracts such uncertainty (Jahalah) is prohibited according to Shari’ah which leads to dispute between contractors, so as far as the matter of shares is concerned, there is no such uncertainty, because shareholders are registered in the joint stock companies or in a brokerage house. Further, where physical shares are transferred, the shareholder’s name is also written in the certificates, therefore there is no such uncertainty that can lead to conflict.
Even most Shari’ah scholars allow the purchase of bearer shares or bearer Musharakah certificates as well, where no one knows the name of shareholder, because of some the reasons mentioned above. If you wish to know more about this issue, you can read the commentary session of the Shari’ah Board of the Islamic Development Bank, Jeddah, in the Majallah of Islamic Fiqh Academy, Jeddah, Session No. 7, Volume No. 1, page 542, resolution No. 4, and the collection of the Islamic Fiqh Academy’s resolutions at page 712.
Question: Does trading in any stock exchange fall under speculative transaction that is haram in Islam? Regards, AZZ
Answer: Speculation and investing in shares are two different acts. While investing and trading in shares is permissible as long as all the necessary criteria is met, speculating market movements with the hope of gaining profits is clearly haram as it is considered similar with betting.
Question: Is it Islamically permissable to buy and sell shares with a stockbroker without exchange of cash. This kind of dealing is quite common where shares are bought and sold on the same day and a closing deal system operates so that the difference (profit / loss) is calculated and this is payable to or by the client.
Answer: Without having possession any thing can not be sold further, in the above-mentioned case where the subject matter is not delivered, it is not permissible to do the same business.
Question:Many Muslims invest in stocks (stock market). The argument is that, since there are risks where one can lose or gain, that it constitutes doing business so long as one does not buy stocks on the margin or be involved in direct interest bearing investments. Please explain the limits of investing in the stock market or if it is forbidden and why?
Praise be to Allaah.
There is nothing wrong with selling or buying shares if they are shares in permissible companies. If it is an agricultural company, for example, which produces permissible agricultural products, then it is permissible to buy and sell shares in it; the same applies to companies which deal in real estate, manufacturing, etc.
It is permissible to buy the shares of other people and pay them the price immediately, so that one will not be selling a loan for a loan.
Excluded from this are companies which deal in haraam things, such as selling alcohol, tobacco and music tapes. It is not permitted to have shares in these companies, or to buy these shares. If the company openly deals in ribaa (usury, interest), then it is not permissible to deal with it. but if a manufacturing, agricultural or business company is compelled to deposit its money with the bank in order to protect it from being lost or stolen, then it is permissible because of that necessity for the owners of the company to get rid of the interest which the bank gives them on their deposits. Companies should also avoid using riba-based loans in order to set up production lines and factories; that should be achieved by using cash and the money of the shareholders.
And Allaah is the source of strength.
Sheikh Muhammed Salih Al-Munajjid
The ruling about having shares in companies and banks
Question: What is the ruling about having shares in companies and banks’? And is it permissible for a shareholder (in a company or a bank) to sell shares, specifically after he has become a shareholder himself, to offices dealing in buying and selling (stockbrokers)? And from that which is possible is selling them (the shares) for more than the price that the shareholder paid. So what is the ruling about the profit which the shareholder makes every year from the value of the shares bought?
Response: Having shares in banks and companies that trade in ribaa is not permissible. And if the shareholder wants to rid himself of any ribaa in his shareholding, then he should sell his shares at market value and take the initial investment only. The rest he should give in charity, and it is not permissible for him to take anything from the profits of his shareholding or interest. However, if the shareholding was in a company which does not trade in ribaa, then it’s profits are halaal.
And with Allaah lies all success and may Allaah send prayers and salutations upon our Prophet (sal-Allaahu `alayhe wa sallam) and his family and his companions.
The Permanent Committee for Islaamic Research and Fataawa, comprising –
Head: Shaykh ‘Abdul ‘Azeez ibn Abdullaah ibn Baaz;
Member: ‘Abdullaah ibn Ghudayyaan;
Member: Shaykh ‘Abdullaah Ibn Qu’ood
Fataawa al-Lajnah ad-Daa.imah lil-Buhooth al-‘Ilmiyyah wal-Iftaa. – Volume 13, Page 508, Fatwa No.8996