Global (عربي)
KSA (عربي)
Global (عربي)
Islamic finance has witnessed a rapid expansion in the last few decades, with a variety of Shariah-compliant instruments and Islamic banking services being introduced.
Shariah-compliant sukuks and stocks have driven much of this expansion. The principles of Islamic finance and conventional finance are totally different from each other.
Many investors are seeking to invest in Shariah-compliant stocks due to the presence of Shariah-impermissible factors in conventional stocks, such as usury, uncertainty, and others.
As a result of these impermissible elements, different types of substitutes have been introduced in the Islamic stock market. With the existence of the Islamic capital market, people now have more business alternatives.
Various types of options have been introduced for Muslim investors, including Islamic bonds, sukuk, and Islamic stocks (Shariah-screened stocks).
Stock investing is the process of buying shares of companies to become a partial owner of the company and earn returns through dividends or the appreciation of the shares.
This process takes place through the stock exchange, where shares of various companies are presented for sale and purchase.
Stocks can be defined as ownership of a specific portion of a company. When someone buys a stock, they become a shareholder, meaning they own a share of that company.
A stockholder earns profit through dividends and the appreciation in the value of the stocks.
-Common stocks: give potential dividend and voting rights to the stockholder.
-Preferred stocks: usually do not have a voting right but fixed dividend and higher claim on assets.
Equity can be defined as the total value that belongs to the shareholders and owners after liabilities are subtracted from assets.
It can be expressed with the equation: Equity = Assets – Liabilities. Equity is a broader term that refers to ownership value remaining after all debts are paid.
From a Shariah perspective, when someone purchases a share of a corporation, they are considered the owner of that portion equivalent to the amount paid for the share.
According to the Islamic principle of profit and loss sharing, if the business incurs a loss, the shareholder bears it in proportion to their ownership. Likewise, in the case of profit, the shareholder gains a share of the profit accordingly.
According to the AAOIFI Shariah standard related to the financial papers (shares and bonds), “Inan is the basis for the permissibility of participation by two or more persons with their wealth and labour”.
There are different types of Musharakah, among these types the ownership in stocks comes under the shirka tul Inan.
For more details, please read our article about What are the different types of musharkah?
Intention (niyyah) plays a significant role in every aspect of a Muslim's life. If a person’s intention is to earn halal income through a business activity, and they invest in Shariah-compliant stocks, then their investment can also be spiritually rewarded.
Participation or trading in a corporation whose primary activities are Shariah-permissible, but which occasionally engages in interest-based borrowing or lending, is generally not allowed in Islam.
The fundamental Shariah principle regarding investment in such companies is that purchasing shares in them is not permissible. However, an exemption is made for subscription and transactions under certain terms and conditions:
i -That the corporation does not state in its memorandum of association that one of its objectives is to deal in interest, or in prohibited goods or materials like pork (swine) and the like.
ii - That the collective amount raised as loan on interest – whether long-term or short-term debt – does not exceed 30% of the market capitalization of the corporation, knowingly that raising loans on interest is prohibited whatsoever the amount is.
iii- That the total amount of interest-taking deposits, whether short-, medium- or long-term, shall not exceed 30% of the market capitalization of total equity, knowingly that interest taking deposits are prohibited whatsoever the collective amount is.
v-That the amount of income generated from prohibit ed component does not exceed 5% of the total income of the corporation irrespective of the income being generated by undertaking a prohibited activity, by ownership of a prohibited asset or in some other way.
If a source of income is not properly disclosed then more effort is to be exerted for identification thereof giving due care and caution in this respect. For more detail please refer to the AAOIFI Shariah standard number: 21
Read more about: Guiding principles & tools of the shariah-compliant stocks trade
The stock portfolio for Shariah compliance should be reviewed at least once every 3 to 6 months, or whenever the company updates its financials.
This helps investors ensure their investments remain aligned with Shariah principles.
Recommendations for screening tools and financial advisors
To ensure whether the investment in a corporation is halal or not, there are different Shariah Advisory Councils that oversee the Shariah compliance of shares. Shariah scholars,
who have a strong understanding of trade in the stock exchange market, carry out the screening of shares.
The Shariah board of the corporation, which consists of Shariah experts, also provides a statement on the overall activities of the corporation. This helps investors make informed decisions about their investments.
To check the full process of Shariah screening, please read our written article: Halal Stocks Screening & How to Purify Them
(Considerations for investing in foreign stocks with respect to halal compliance.)
To navigate the complexities of the international stock market, it is important to ensure that the overall business activities of the corporation comply with Shariah principles.
Use Shariah screening tools to check whether the stocks are halal or not. Also, review the debt-to-equity ratio and income sources to see if they meet the criteria prescribed by AAOIFI.
Read more about: Why many common securities trading strategies are considered haram?
References:
Aisah, N., Sholahuddin, M., & Rahmawati, S. D. R. (2022). Sharia and Conventional Stock Investment. Journal of Business and Management Studies, 4(2), 464-476.
https://aaoifi.com/ss-21-financial-paper-shares-and-bonds/?lang=en
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
