The Stock Exchange is a market where securities and Shares are bought and sold. The stock exchange is a natural corollary of the principle of limited liability. The limited liability theory restricts the liability of each holder of shares to his own holdings and does not extend to his personal fortunes. Since the liability of the shareholders is limited, the individual shareholder should be free to sell his shareholdings anytime he wants: This has led to the evolution of transfer of instruments and devices in the the absence of which a shareholder would not be able to redeem his money immediately at his will.
The Nigerian Stock Exchange was established in 1960 as the Lagos Stock Exchange. In December 1977 it became The Nigerian Stock Exchange NSE), with branches established in some of the major commercial cities of the country. The NSE, one of the biggest equities marketplace in Africa, is home to about 260 companies. The Exchange, made up of 10 Government Stocks, 55 Industrial Loan (Debenture/Preference) Stocks and 195 Equity / Ordinary Shares of Companies, all with a total market capitalization of approximately N875.2 billion, as at March,10, 2003. Most of the listed companies have foreign/multinational affiliations and represent a cross-section the economy, ranging from agriculture through manufacturing to services.
Functions Of Stock Exchange: There are a number of useful functions which a stock exchange performs. For example, it provides a ready market for investors to buy and sell their shareholdings. It pools resources for the public companies and government and provides them funds readily. Stock exchange disseminates a variety of useful information to prospective buyers and sellers. But stock exchanges have become hotbeds for the growth of speculators. The speculators are not genuine investors but they are usually the most well-informed people. The buying and selling sprees based on rumors and mental calculations of the speculators lead to booms and depressions.
As a result of these upheavals, the economy gets out of tune. However, the stock exchange employs a number of business techniques, which are not permissible, or at best are in need of modification, in Islam. First, the stock exchange permits the sale and purchase of shares and securities without physical transfer of these certificates from the seller to the buyer. Thus, one share may be sold a number of times before an actual delivery takes place. The Islamic law does not permit the sale of an article until one has the physical possession of the article. Riba Transactions The stock exchange permits transactions in fixed-income instruments such as bonds, treasury bills, commercial papers and others.
A bond is a certificate of debt issued by a corporation, pubic institution, government or bank. It is defined as "a long-term loan the payment of which is guaranteed by the borrowing corporations by a specified future date." This makes it clear that a bond is a loan and that the bondholder receives fixed, periodical interest. Thus, it is a type of interest-bearing loan. Contemporary scholars are virtually unanimous in forbidding trading in bonds because of the usury interest they involve. Another instrument of business is "contango", which is a rate of interest paid by a bank on money borrowed with which to pay for stock which one has bought; the money is borrowed from one account day to the next account day, and the bank is said to "contango" the stock or to carry it over. The "contango" is un-Islamic as it is an open transaction in riba.
Option Sales: The stock exchange permits "option" sales. The "option" signifies choice and in stock exchange it means the choice to deal or not to deal in a particular share at a later date, at todays price. The person who exercises the option gives option money. usually a fraction of the price of each share he wants to buy or sell. The option money is known as call money if the person wants to purchase the shares, and put money if he wants to sell it. A giver of call money has the right to purchase shares during the call period at todays price; a giver of put money has the right to sell, and the giver of put and call money has the choice either to buy or to sell.
The option sales transaction violates the Islamic law of bay al salam which regulates credit sales involving advance payment of money. One of the conditions of bay al salam is the payment of full price of the product in advance. It is not to be only a small fraction of the total sale price. A deal which involves both a future delivery and a deferred payment of price is not allowed in Islam. The price of the commodity has to be paid in full in advance. It means both the product and the price have not to be nonexistent (or undelivered) at the time of the contract. Only one of them could be deferred.
In case of option sales in stock exchange both are deferred. Another point is, that in the option sales, if the giver of call or put money does not like to proceed further, his advance is forfeited by the taker. This falls under the purview of bay al urban, which has been prohibited by the Prophet (sallaalahu alayhi wa sallam) RecentIy, an active futures market has emerged for options sales; based on the same principles of the futures market in commodity and foreign exchange. Futures market in anything is inherently disallowed in the Islamic economic frame the minority of the scholars options as permissible agree that it is in need of reforms and rigorous monitoring. The Islamic economy would have the institution of stock exchange which would fit in It’s" overall framework and suit its socio-economic goals. It will eliminate speculation by non-genuine investors, without abolishing a free-market for shares and certificates.
This article was culled from the publications of Deen Communication Limited