KSA عربي
KSA عربي
Global عربي
There are various types of transactions that are considered invalid (bāṭil) from a Shariah perspective. One of the most commonly debated among them is short selling.
In many cases, short selling involves fictitious transactions where actual ownership and delivery of the asset do not take place; instead, the parties merely settle the price differences, which resembles speculation (maysir).
Additionally, such transactions often involve forward sales or short sales, both of which are prohibited in Shariah due to the absence of possession and ownership at the time of the sale.
The Prophet Muhammad (ﷺ) said: “Whoever purchases foodstuff should not sell it until he takes possession of it.” (Sahih al-Bukhari) (Usmani, 2015).
Short selling in the commodity market, equity market and currency market falls under the same category. (Usmani, 2015)
Short selling refers to a type of sale in which a seller sells a commodity before owning or possessing it. From a Shariah perspective, it is a fundamental requirement that a person must own and possess the commodity before offering it for sale.
The short selling works with the following steps:
i- Firstly: the seller borrows a commodity or share from another party typically through a broker without owning it himself.
ii- Secondly: the seller sells the borrowed item in the open market at the prevailing market price.
iii- Thirdly: the seller waits and hoping that the market value of the commodity or share will fall over time.
v- Fourthly: if the price fall, he purchases the same item from the market at lower price and return back it to the original owner.
vi- Fifthly: the seller retains the difference between the sale and purchase price as a profit.
Investors choose to short sell when they believe the price of a commodity or share will decrease in the future.
They sell it at a higher price, then later buy it back at a lower price, return it to the lender, and keep the price difference as profit.
A short squeeze happens when the price of a stock unexpectedly rises, pressuring short sellers to buy back shares quickly to avoid further losses.
This sudden rush to buy increases demand, driving the price even higher and leading to larger losses for those who bet against the stock.
Short selling is totally different from traditional investment. In traditional investment, the investor purchases the stock first, hoping that the price will increase, so he can sell it later and earn a profit.
In contrast, in short selling, the investor sells the borrowed stock and waits for the price to fall. If the price drops, he purchases the stock from the market, returns it to the lender, and earns a profit from the price difference.
Short selling is impermissible from a Shariah perspective because the short seller sells a stock or commodity that he does not own. As stated in the Hadith:
“The Prophet Muhammad (ﷺ) said: ‘Whoever purchases foodstuff should not sell it until he takes possession of it.’” (Sahih al-Bukhari)
From this Hadith, it is clear that selling something before taking possession is not allowed in Islam.
Additionally, the AAOIFI Shariah Standards affirm this ruling:
“It is not permissible to sell shares that the seller does not own (short sale), and the promise of a broker to lend these at the time of delivery is of no consequence.”
(See Item 4/1/2/7 of Shariah Standard No. 12 on Sharikah (Musharakah) and Modern Corporations) (Ummah, 2019)
For further details, please refer to the AAOIFI Shariah Standards.
There are certain transactions where Shariah permits the sale of a commodity before taking possession,
such as Salam and Istisna.In Salam, the seller sells a commodity for deferred delivery while receiving full payment in advance.
For more details, refer to the Shariah Standard on Salam.
Read more about: Salam Contracts vs. Futures Contracts
In Istisna, the buyer and seller agree on a contract where the commodity is manufactured or produced and delivered in the future, and the payment may be made in advance, in installments, or upon delivery.
For more details, refer to the Shariah Standard on Istisna. These transactions are permitted because they avoid elements of uncertainty (gharar) and gambling (maysir), which are prohibited in Shariah.
Read more about: Your Basic Guide to Istisna
References
- Ummah, M. S. (2019). AAOIFI Eng. Sustainability (Switzerland), 11(1), 1–14.
- Usmani, M. I. A. (2015). Guide to Islamic Banking New. 342.
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.
