Islamic Banking And Share Trading

Question

I am not too convinced with the present day islamic finance which is applied in the conventional banks as well as those with Muslim names.

Similar is the issue with stock markets. One point that i have totally failed to understand is the concept of permissibility in investing in those companies which deal in interest on condition their interest earnings/dealings are below 33%.

Theoretically by me buying shares in a company I become a co owner. It therefore means being a co owner in a company dealing in interest is permissible as long as it is registered as a public limited company.

But then why would interest not be permissible for me as a sole trader.  If i have a shop which I run by myself then why can’t i take loans and invest in interest based instruments and make sure it doesn’t exceed 33%.

I am genuinely confused and have failed to understand the rationale in this 33% concept. Buying shares in a public limited company is permissible even if it deals in interest as long as it is till 33%. But by myself I can’t be a sole trader doing the same.

Please explain to me as i am really confused.

 

Answer

Islamic Finance

We are not privy to the setup, inner workings and
Modus Operandi of the “Islamic” products offered by commercial banking institutions. Hence, we are unable to determine if the principles and conditions established by the Fuqaha (jurists) are conformed to and effectuated. However, we personally would advise that you avoid any involvement in these products.


Share Trading

A difference of opinion exists among the Ulema with regard to trading on the stock market. Our Darul-Ifta subscribes to the view of those Ulema who opine that it is impermissible to trade in the shares of, or invest in a company listed on the stock market.

The Fatwa of Hadhrat Mufti Mahmood Hasan Ghangohi Rahmatullahi Alaih with regard to trading on the stock market states to the effect, that the relationship between the shareholder and the company  cannot be classified under any of the business partnership transactions allowed in Shari’ah. Some anomalies are detailed below:

1. In an Islamic partnership, a shareholder of a company is responsible for the debts of the company, as opposed to the shareholder of a listed company who is not responsible for the debts of the company.

2. In an Islamic partnership, the personal assets of a shareholder of a company may be attached to pay the debts of the company. No such avenue exists with the shareholder of a listed company. 

3. In an Islamic partnership, the shareholders of a company are liable for the losses the business incurs proportionate to their respective shares. The shareholders of a listed company do not participate in the losses of the company. (Shares, Unit Trusts, and the Sharia’h pg. 13-15). 

It is evident from the above that the trading of shares on the stock market does not meet the requirements of Shirkat (partnership) in Islam.

Moreover, for the validity of a business transaction it is necessary that it be conducted according to the dictates of Shari’ah. Even though a company may be trading in permissible commodities, due to the core business activities being managed by Non-Mulsims (or Muslims) who are ignorant of the laws of Shari’ah, the transactions carried out may be in an impermissible manner. The income accrued therefrom will therefore be impermissible as well.

Bearing in mind the fundamental principle of Riba (interest/usury) being prohibited, just as the involvement in any interest-based transaction is impermissible, likewise is trading in the shares of, or investment in a company which deals in any Haraam commodity. Hence, the same ruling will apply to a company (be it a public listed company or not) dealing in interest, regardless of the ratio/percentage of its earnings accrued via interest.

As you have stated, the common understanding in the business world is that the shareholder becomes a partner/co-owner in a company due to the shares that he has purchased on the Stock Exchange. Consequently, the shareholder is automatically made party to every transaction into which the company enters. Should the company engage in any Haram dealing, the shareholder will be aiding and co-operating in sin and transgression, the prohibition of which is clearly stated in the Quraan-e-Majeed:

 

وَتَعَاوَنُوا عَلَى الْبِرِّ وَالتَّقْوَى وَلَا تَعَاوَنُوا عَلَى الْإِثْمِ وَالْعُدْوَانِ وَاتَّقُوا اللَّهَ إِنَّ اللَّهَ شَدِيدُ الْعِقَابِ
[المائدة: 2]

Translation: “Help one another in virtue, righteousness and piety; but do not help one another in sin and transgression. And fear Allaah. Verily, Allaah is Severe in punishment.”

 

References

الَّذِينَ يَأْكُلُونَ الرِّبَا لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذَٰلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا فَمَن جَاءَهُ مَوْعِظَةٌ مِّن رَّبِّهِ فَانتَهَىٰ فَلَهُ مَا سَلَفَ وَأَمْرُهُ إِلَى اللَّهِ وَمَنْ عَادَ فَأُولَٰئِكَ أَصْحَابُ النَّارِ هُمْ فِيهَا خَالِدُونَ

(البقرة: 275)

عن جابر رضي الله عنه قال لعن رسول الله صلى الله عليه وسلم آكل الربا وموكله وكاتبه وشاهديه وقال هم سواء

(صحيح مسلم، الرقم: 106)

الربا هو الفضل المستحق لأحد المتعاقدين في المعاوضة الخالي عن عوض شرط فيه

(الهداية 3/78)

 لأن الربا هو الفضل الخالي عن العوض

رد المحتار (5/ 169)

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