The terms shares and stock can be used interchangeably. A share is a defined portion of the capital of a company. It is the share that the shareholder has in a company, or a portion of the total capital of a company, written on a certificate that has a nominal value so that the shares in totality represent the capital o the company, and are all of equal value. Infact, the name “shares” is very appropriate because when one buys them, one actually shares in a company’s ownership. It is for this reason that stocks/shares are also known as “equities” because all of a company’s shareholders, by owning a fractional part of the company, have equity in that company.
Moreover, as a part owner of the company, the investor shares in the risks of ownership. If business is good, the value of the shares rises, dividends are distributed, and the shareholder profits. If business is bad, the value of the stock decreases and the shareholder realizes no capital gains. He may even suffer losses. And dividends may be withheld. Anyone that has invested in the Nigerian Capital Market in the past two years would have witnessed both the good times of dividends and capital gains as well as the low times of massive capital loss and near penury!
Characteristics of shares
Shares have a number of characteristics, the most important of which are:
1) All shares are, by convention of the same value.
2) Shares are negotiable. This means that ownership of shares [especially those of public quoted companies] can be transferred through ordinary commercial methods of buying and selling. The market in which shares are bought and sold is called the stock Market. For private or public companies that are not quoted on the stock Exchange the shares are still negotiable by methods of civil transfer which make it necessary for the issuing company to approve or to be notified of the transfer.
3) They are indivisible when dealing with company. If several people, either through purchase or inheritance, own a share, they have to choose one of them to represent them in exercising the rights to which they are entitiled when dealing with the company.
4) A shareholder has a limited liability. His responsibility is limited to the value of the shares. He is not expected to answer for any debts of the company beyond the shares that he owns.
Is ownership of shares Islamic?
This is good point to start from. First, private ownership is clearly approved by Islamic law. All of the transactions for buying and selling described in the Qur’an and the Sunnah or the classical manuals of fiqh, are predicated upon the principle of private ownership. Of course, the real owner of all that is in the heavens and the earth is Allaah. Muslims understand that whatever they possess in this world is actually something that they hold in trust for Allaah.
Secondly, the sort of business ownership recognized and approved by Islamic law is asset backed ownership such that one's holdings are real. Therefore, as the purchase of a company's shares makes the shareholder a partial owner in the company and its assets and inventory, such ownership is consistent with Islamic legal principles.
There is unanimity of views on the general permissibility of buying and selling shares. It says in the Fatwa Committee of the Kuwaiti Finance House '(Bayt al-Tamweel al-Kuwaiti) Fatwa. no. 532 that, "In principle, there is nothing wrong, from the point of view of Sharee'ah, with holding shares in industrial, commercial or agricultural companies, because they are subject to profits and losses. It is akin to the kind of investment approved of in Sharee'ah, subject to the condition that these companies keep away from riba-based , transactions, whether they are paying or taking interest."
Types Of Shares
Since shares are halaal, should the Muslim investor buy just any kind or type of shares and in any or every type of business? From the above paragraph, the obvious answer is No!
Types Of Shares: Firstly, ownership shares issued by companies and traded by investors/shareholders include both ordinary [or common] shares and preference shares: As a general rule, the Muslim investors may trade only in ordinary shares.
Preference Shares: While there are several ways in which the two types of shares differ, the most significant way, from an Islamic point of view, is that preference shares guarantee the amount of the dividend to the shareholder. Such a predetermined and guaranteed rate of return is prohibited for the reason that it is classified as riba (interest or usury). For similar riba-based reasons, fixed-income securities [such as bonds, treasury bills, term deposits, commercial papers or banker's acceptances] are also prohibited. Clearly, eeman and prudence dictate that Muslim investors stay away from preference shares. Mercifully, preference shares are a rarity on the Nigerian Stock Exchange.
Types Of Business
The type of business of the company is the most important aspect for the Muslim investor. Generally, the core business of a company may be classified as haraam or halaal according to the Sharee'ah screen. We should first discuss the Muslim investor's attitude to this classification.
Forbidden [Haram] Businesses
A Muslim cannot invest in any company whose business activities are basically haraam. The list is not very long and it includes regular financial services, gambling, liquor, pornography, hard drugs, statues etc. Notice here that we are talking about the "core" of the business activities of the company. A big company whose cafeteria in the headquarters building sells beer doesn't present a violation of this restriction. Border-line cases, however, can be presented to the scholars and people of knowledge for resolution on a case by case basis.
Therefore, companies in the financial sector, like conventional banks and insurance companies must be avoided. The same is true with regard to companies in the entertainment and leisure sector, like hotels and casinos that derive large percentages of their revenues from gambling and alcohol.
Clearly, if a company is in the business of producing, packaging, marketing, wholesaling, retailing, or otherwise dealing in a haraam substance, such as gambling, pork, alcohol or other intoxicants, cigarette etc; then the owner of that company's shares is equally directly involved.
It is forbidden to issue, subscribe to, or deal in, i.e. purchase or sell all these types of stocks. One condition of a sale transaction is that the sold item should be lawful, and shares of companies such as these are not. One is not aware of any controversy among contemporary scholars over the prohibition of such stocks. And Allaah knows best!
Permissible [Halaal] Businesses
This means that a Muslim should invest in the shares of companies that are engaged in permissible activities. These are the companies whose activities all fall within the scope of halaal: their capital comes from legitimate sources; they engage in permitted transactions; their memorandum and articles of incorporation stipulate that their dealings are within the range of permitted actions; they do not engage in usury, whether in borrowing or lending; and they include no preference nor a financial guarantee to some holders and not to others.
The shares of this type of companies whether they are commercial, industrial, or agricultural are lawful to issue, subscribe to, purchase, and sell, and there is no disagreement over that. Without doubt, such companies are rare to come by and this makes investment more tasking for the Muslim.
Operation Of Businesses
The second Sharee'ah screen has to do with the operation of the business. The way a business [whose core activity has passed the first screen] is run may make it become a company of mixed activities.
In today's corporate and capital market environment, companies are merged, acquired, consolidated, spun-off, split-off, and so on. Oftentimes, the result of such reconfigurations will be that a company engaged in a primary business activity that clearly conforms with Sharee'ah precepts will acquire a division or a subsidiary engaged in business that does not-conform with those precepts! This is an example of a company with mixed activities by type of business.
There are also companies of mixed activities resulting from their manner of operations. These are companies in which the core business is permissible; they produce commodities and offer services that are legitimate, as the case is with telecommunications, oil and gas, consumer goods, pharmaceutical, cement, electric, and the like. However, because they operate in a capitalist environment they may have to finance their operations through interest-bearing loans or the investment of their surplus liquidity in short-term interest funds.
This is one of the serious problems of this age, because quoted companies are many, they exist locally and internationally, and it is rare to find any of them which are completely free from partial dependence in its financing on interest-bearing loans and/or from depositing their surplus liquidity in time deposits. There has been a great controversy over the ruling of having shares in such companies. Researchers fall into two groups, one allowing and the other forbidding such shares.
It Is Permissible, But....
The first opinion is that it is permissible to hold the shares of such companies. Certainly it would
be preferable if one can find companies so pure that they depend completely on their own income, and always rely on self financing. But this is hardly possible. The question becomes, then, how to set parameters that guarantee selection of companies with minimal involvement in such non-permissible financial transactions. The following parameters are indicated:
Debt to equity ratio: Debt to equity ratio represents the relationship between funds supplied by creditors (debt) and shareholders (equity). The problem with debt in the capital structure of a company, from an Islamic point of view, is that it is interest based. Borrowing on interest is not permitted; therefore it is necessary that such borrowing is limited to a tolerable level. In certain situations Sharee'ah treats minute and insignificant amount of haraam as negligible, having no effect on the permissibility. But what is the cut-off point?
There are some indications in Sharee'ah which point to "one third" as "plenty", and anything less than one third is "trifle". Though such indications came in different contexts still contemporary scholars consider that a debt to equity ratio of less than 1/3 is tolerable. This they say is because hardly any company can do without some debt.
Interest earning: Companies whose core business is production of goods and services draw their income from profits generated from sale of such goods or services. It does happen. However; that such companies have excess cash that is deposited in interest bearing accounts or invested in money market instruments. Such incomes are unlawfully from an Islamic point of view and should not exceed 5% of the company's profits. This amount must be identified and the Muslim investor should set aside whatever such percentage constitutes out of the returns on investment. The investor would then donate the same to charity without expectation of reward without considering it as zakaah and without using it as a means of paying taxes!
Cash and Receivables: Sharee'ah distinguishes between sale of real goods and that of money and debt. In the latter such sale can only be done at par value. Thus, the liquidity of the company should not exceed 50% of its assets. Otherwise the stocks would count like money and could be exchanged only for their face rather than market value.
Evidences For This Position
Those who hold this opinion include the Academy of Islamic Jurisprudence, the Islamic Law Commission of the Rajhi Company, the Islamic Law Commission, the Islamic Bank of Jordan, and some contemporary scholars including Shaykh Ibn Uthaimeen, Shaikh Abdullah ibn Munai'. Based on this, some companies have computer programs that select what meets the controls listed above out of financial instruments [e.g Islamic Dow Jones in the USA].
Three main evidences are cited by those who give this ruling. First is the fiqh rule that "subordinations permits what is impermissible independently" Shares of this type have a small percentage of unlawful profit which accrues in subordination and is not a sought asset for ownership and disposal; hence their sale falls under this maxim.
Second is another fiqh maximal that "general interests counts, the same as individual necessity". The application of this rule lies in that people need to have shares in companies. in order to invest their savings when they are unable to exploit them independently. Moreover, such investments bring the country and the people prosperity and affluence.
Finally, there is overriding advantage in such investments. When upright people who are opposed to the unlawful operations hold these stocks, an advantage is gained for Islamic Law through the elimination of such operations when these people become members of the boards of directors.
Those who oppose this view contest these evidences on the grounds that fiqh maxims, whether agreed upon or not, cannot be cited as evidence, because rules of jurisprudence are rulings of a majority which are not necessarily constant. They disagree that such investments are a general need because there are other legitimate means of investment and making money. True, they agree that not investing in mixed companies involve hardship for the Muslim; but so are some other Islamic rulings. Finally, the claimed advantage is uncertain; but the contamination of the investor's earnings is not.
It Is Not Permissible
The second opinion is that investment in companies whose activities are basically legitimate as still unlawful if these companies engage in some unlawful transactions; such as lending and borrowing with interest. It is held that subscription and ownership of these stocks as well as buying and selling them is forbidden.
The parties who hold this opinion include the Permanent Committee of Academic Research and Giving Legal Opinions in the Kingdom of Saudi Arabia, the Islamic Law Commissions of the Kuwaiti House of Finance, the Islamic Bank of Dubai, and the Islamic Bank of Sudan, as well as a large group of contemporary scholars. This position also rests on three main planks. The first plank is the general and absolute prohibition of riba; whether small or large.
Allaah says, "O you who believe! Be afraid of Allaah and give up what remains (due to you) from riba [interest] (from now onward), if you are really believers. And if you do not do it, then take a notice of war from Allaah and His Messenger but if you repent, you shall have your capital sums." (Q2 [Baqarah]:278-279). The warning against a war waged by Allaah and His Messenger is a great threat and a severe punishment. Everyone must move away from even the smallest of such sin in whatever guise.
Co-operate In Righteous Acts, Not Sin
Then, the Prophet (salallahu alayhi wa sallam) said, "A dirham of usury earned by a man, when he is aware of it, is worse than thirty-six acts of adultery.." (Ahmad and Daraqutni)
The evidence here is that the Prophet (salallahu alayhi wa sallam) considers the earning of one dirham of usury a destructive sin and makes this severe threat a consequence of it. How then about a person who deposits large amount of money in interest dealing banks? Meanwhile, figuring the amount of unlawful earning is a matter of guessing, and it is not unlikely that some forbidden money would get into the earnings of such an investor.
The second plank is the injunction of Allaah that:
"Help you one another in virtue, righteousness and piety [al-birr and taqwa]; but do not help one another in sin and transgression. And fear Allaah. Verily, Allaah is Severe in punishment." (Q5[al-Maaidah]:2)
The point here is that by investing in companies engaging in forbidden transactions, a person cooperates with them in sin; whereas, this injunction forbids such cooperation.
The final plank is that when the company takes riba-based loans or invests in riba-based instruments, it is the same as if the investor is doing so. Any action that the company takes is an action of the investor too!
Therefore, as it is forbidden for a person to invest part of his money, regardless of how' small, in forbidden transactions, it is also forbidden for him to contribute to companies that have forbidden dealings, because the invested money is his own.
From the two positions above, it is easy to conclude that ownership of this type of share is not free from suspicion. If a person wants to follow the course of caution and devotion, it is better to avoid such stocks. This position is further strengthened by the Prophet's saying that:
"That which is lawful is clear and that which is unlawful is clear and between the two of them are doubtful [or ambiguous] matters about which not many people are knowledgeable. Thus, he who avoids these doubtful matters certainly clears himself in regard to his religion and his honour... " (Bukhari)
And also his saying:
"What I have forbidden you, stay away from. What I have ordered you [to do], do as much of it as you can." (Bukhari)
However, the first argument is not devoid of validity. We hope a person who accepts this argument, following the example of those scholars, is free from wrongdoing, by Allaah's will! This is provided that he gets rid of the percentage of earnings from those shares that represents forbidden revenues and observing the controls referred to above in discussing this argument. Further, we believe that additional comfort will be achieved if the Muslims contribute their investment funds into a pool which will then be managed by Muslim professionals who are conscious of the Sharee'ah restrictions. And Allaah knows best!
This article was culled from the publications of Deen Communication Limited