Is trading company Stocks – Shares and Bonds Permissible – Fatwa

ANSWER BY DR.AJEEL AN-NASHMI

(Former Dean of Shariah Faculty at Kuwait university)

Q: Is trading company shares and bonds permissible?

Ans : Before giving a legal on this issue we should first determine what the financial term “SHARE” and “BOND” essentially mean, as well as detail the different between the two, for judging anything is contingent upon one’s understanding of what they mean, as the well-known legal rule stipulates.

Share : A share is one of a finite number of equal portion in the capital of a joint stock company , entitling the owner to a proportion of distributed, non-reinvested profit known as dividends and to a portion of the value of the company in case of liquidation.

However, if our owner did not have necessary funds to start their own business they could finance their operation in one of two ways:

Bonds: A bonds is certificate of debt issued by a government or corporation guaranteeing payment of the original investment plus interest by a specified future date. The main types of bonds are: the corporate bond, the municipal bond, the Treasury bond, the Treasury note, the Treasury bill and the zero coupon bond.

The following are some of the most salient distinction between the two:

  • The interest or return the share gains or wanes proportionate to the trading activities of the issuing entity (bank, government, corporation, etc.).As for bonds, the interest or return on them are fixed (neither increase or decrease)

 

  • The shareholder partial ownership of the issuing company commensurate with the number of shares he holds. Whereas bondholder are in essence lender to the issuer.

 

The forgoing consideration lead to conclude that shareholding, as long as share prices are subject to the fluctuation caused by the market mechanism of supply and demand, is legally permissible. The only case it becomes impermissible is if the dealing of the issuing firm involve riba (i.e., paying or receiving interest on loan, etc.,) or if it trades in prohibited item such as alcohol, pork,etc.

As for bonds, they are prohibited to deal in for are simply interest bearing loan- the issuer is equivalent to the borrower, the bond holder to the lender. And this prohibition applies to either issuing or holding of these bonds.

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