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Tuesday, March 16, 2010

Dealing on the Stock Exchange

Q: I would like to know whether it is permissible to invest in the stock exchange. Obviously, I will endeavour to ensure that the companies in which I invest in does not involve itself in the selling of haraam products.

If it is permissible, please also advise me on what other precaution/s needs to be taken eg. Do I need to remove an interest portion when selling the shares etc.

Investing or buying shares in the Stock Exchange falls under the Islamic transaction of Shirkat or partnership. The Shari'ah has ordained a fixed set of rules to govern the different forms of partnership.

For example, in an Islamic partnership one who invests in a running business becomes the owner of all the stock and assets of that business in proportion to the investment. But when considering the method and procedure of buying shares on the Stock Exchange, it emerges that the purchaser or shareholder who has bought stock is not considered a real partner. In the Stock Exchange the investors don’t become partners in the assets such as fixtures and fittings, or property if any, nor do they own a share in the stock of the company. They are only entitled to a share in the profit. This is contrary to Shar’ee partnership.

Secondly, in Shar’ee partnership profits must be apportioned according to percentage, but this is not the case with shares. Instead, the company’s stock and assets are divided into a fixed number of shares and sold at a fixed price to buyers. When one buys a share one has invested that amount of money into the company. In return one should be promised a portion of the profits. What the Stock Exchange does is it awards shareholders a share of the profits in proportion to the value of their share certificates at a particular time of the year. That value may fluctuate for a number of reasons, as I shall outline further. Islamic partnership demands that the profit should be stipulated in advance and should be in a percentage form and should be commensurate with profits generated by the company after deduction of expenses and overheads.

When one sells share certificates, one is not selling his share in the company. It is merely a “right to profits” that is being sold, and this in itself is not permissible. Mere rights may not be sold according to Shari'ah.

Another point of departure from an Islamic perspective is that the rise and fall of share values on the Stock Market is not always influenced by the profits generated by the company. There are a number of political factors that enter the equation when determining share values. So when one decides to sell his or her share certificates, one may not obtain a value that is commensurate with the profits generated by that company. This in itself invalidates any form of partnership. As such, when one sells shares there is an element of Ribaa or interest involved because you are selling an intangible value in exchange for money. Had the share certificate entitled one to a proper and fully fledged share in the company’s assets, property, and stock, then at least it could be said that one is selling a portion of a tangible commodity which is valid in Shari'ah. But that is not the case in Stock Exchange shares.

Furthermore, a rule of partnership is that any partner wishing to sell up has to offer his share to the current shareholders, not to any outsider. This rule is also broken in the current Share business because one may sell to any willing buyer one wishes.

For these reasons and more, it will not be permissible to trade in the Stock Exchange.

And Allah The Almighty knows best.

Mufti Siraj Desai