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Can Muslim Investors Buy Shares

With the country buzzing about the Safaricom initial public offer, many Muslims will be interested in putting some funds into the blue chip company.

Safaricom is a tempting proposition, which cannot be shunned away easily. However, as with all other temptations dealt with on day-to-day basis, it is imperative that Sharia requirements are given due consideration.

What, therefore, is the stand of Sharia on investing in the shares of joint stock companies? Is investing in stock markets lawful? This article aims to clarify Islam’s stand on investment in shares and the Sharia backings that currently drive the practice.

First, it is worth noting that Islam as a deen (way of life) is distinguished by its relevance to all facets of life, including financial undertakings. These are not only meritorious but in many cases regarded as obligatory.

The Quran is explicit in its advocacy of all forms of legitimate commerce through dozens of verses, such as Chapter 2:275 which reads, “Allah has permitted trade…”

Similarly, financial investment is given relevance by the Prophet as can be seen, for instance, from the Hadith of Amru bin Shuaib related from his grandfather that the Messenger of Allah said: “Whoever is entrusted with the money of an orphan should trade with it and should not leave it sitting to be used up by zakat” (Tirmidhi).

The Messenger (PBUH) urged the trustee on the estate of people who due to age (or other reasons) cannot manage their own financial affairs, to invest it in a business that will yield a return and make it grow until they are in a position to do so themselves. For, if proper investment is not made with such funds, the same will be depleted by zakat (obligatory annual charity), thus leaving the orphan with little or nothing.

Notwithstanding these exhortations to investment, Muslims also are required to put the tenets of their faith into practice in all their business transactions and to stay within the juristic parameters set for all activities.

Even though the format of joint stock companies has no parallel in Sharia, most Muslim jurists agree that the overall legal structure of these institutions can be regarded compatible with the law. This is so because the purchaser of a share in a joint stock company actually acquires an equity stake, which means that, as a shareholder, the investor is a partner in the business.

As a partner, the investor’s equity is exposed to risk such that he actually shares in either the profits or the losses of the company. This, therefore, equates to the Islamic concept of musharaka (partnership) and is regarded acceptable.

However, whether Muslims can invest in present day stock market companies has been a matter of debate between Sharia experts for several years in the past largely for issues relating to the following matters:

What line of business is the company engaged in and can its business activity (or activities) be regarded acceptable from a Sharia point of view? Does the company earn income from non-halal (impermissible) activities?

Does the company earn interest income from its cash surpluses or from other sources? Does it borrow money on interest basis? What percentage of the company’s assets is in cash (liquid) form and/or in debt form?

Lawful business

We will turn to the details underlying these issues shortly. However, what is obvious is that if the main business of a company is not lawful from a Sharia perspective, a Muslim may not purchase its shares.

Similarly, scholars are almost unanimous that if a company is engaged in lawful business, does not borrow money on interest and does not keep its surpluses in an interest bearing account, dealing only in limited cash holdings and receivables, then its shares can be purchased, held and sold without any hindrance.

Such companies, however, are very rare in contemporary stock markets. Almost all companies quoted in present day markets are, in some way, involved in activities that violate the injunctions of Sharia. Indeed, the typical joint stock corporation both pays and receives interest.

Most companies are at least partially capitalised with debt and pay interest to their creditors, who hold bonds or other liabilities. Companies also typically receive interest on cash which they hold in banks or from other market investments. A company may also charge its customers penalty interest on any overdue accounts receivable.

In view of this, some Sharia experts say it is not allowed for a Muslim to deal in the shares of such companies, even if its main business is halal.

However, a large number of contemporary scholars do not endorse this conservative view, arguing that limited amounts of interest earnings or a few acts of borrowing should not render the whole business of the company as haram.

Many contemporary Muslim jurists say that dealings in the shares of joint stock companies can be acceptable provided a host of conditions are satisfied:

he business

The main business (or businesses) of the company should not violate Sharia. Industry sectors that don’t manufacture or market forbidden products are generally considered halal, acceptable for Muslim investors. They include chemical manufacturers, computers and computer software, energy, telecommunications, textiles, transportation, agricultural production and automobiles.

When considering such companies, however, it is important to study the company’s revenue and what portion of it may be earned from impermissible activities.

Companies considered haram, whose shares cannot be acquired or traded include: those engaged in interest-based financial products such as conventional banks, insurance companies and companies engaged in conventional hire purchase or factoring businesses; companies that manufacture, sell or distribute liquor, narcotics and so on; companies engaged in the production, manufacture, sale or distribution of pork or other non-halal meat products; companies involved in or supporting gambling, night club activities, pornography, prostitution and so on.

A number of other businesses, such as those that harm the environment, have poor track records with regard to labour or developing countries, or produce and market tobacco or weapons have also been deemed as unacceptable by a cross-section of Muslim scholars.

Financial screens

Once a company’s activities are confirmed as acceptable, scholars have outlined the following set of financial screens:

i) What is the level of income generated from non-halal activities? If a company earns some income from non-halal activities, it should not exceed five per cent of the company’s total income. If it does, then it is not permissible to invest in that company.

ii) What is the level of interest income generated by the company? Sharia scholars permit investment in companies whose income from interest forms less than five per cent of total income. It is worth noting that even when the financials abide by this limit, a purification of earnings received from such companies must be undertaken through charity. For example, if four per cent of the company’s income arises from interest-bearing deposits, then four per cent of the dividend received by a Muslim investor must be given away in charity.

iii) What is the level of interest-bearing debt that the company owes? The company’s interest bearing debt should not exceed a third of its market capitalisation.

This can be calculated as Total Debt divided by Trailing 12-Month Average Market Capitalisation (where Total Debt = Short-Term Debt + Current Portion of Long-Term Debt + Long-Term Debt).

iv) What is the level of cash and receivables (including interest bearing securities) in the company’s balance sheet? According to a consensus Sharia view, both cash and receivables (deyn) cannot be traded at a premium or even at a discount and can only pass hands by way of assignment at par.

Company’s total asset

Hence, scholars are of the view that the level of cash and receivables (including interest bearing securities) should be a maximum of 49 per cent of the company’s total asset base.

Notwithstanding the above criteria, various other matters need consideration:

a) The computation of the ratios should be based on the company’s most recent (and preferably audited) financial information.

b) Constant monitoring of the company’s subsequent financial behaviour is required to ensure that it remains within the given thresholds. This assumes constant availability of financial information about the company.

c) Analysis of the company’s financials should be undertaken by a competent person.

Sharia, through the Quran, the Sunna and Ijtihad, is deemed to continue providing solutions to the dynamic needs of Muslim societies. This is exemplified by the interpretational efforts undertaken by learned scholars and jurists in the past few years to come up with guidelines to identify what may be regarded as permissible stocks in dealing with listed joint stock companies.

However, it should be remembered that the matter under discussion is extremely sensitive and is subjected to continuous scrutiny and change by the scholars in the light of new insights. Hence, these opinions should not be taken as “divine rules” of Sharia compliance.

Finally, two other issues relating to investing in shares are worth considering:

a) Investible funds must be from a halal source. Hence, a Muslim investor cannot borrow on interest to finance the purchase of shares.

b) Also, unlike conventional investors, Muslims are generally discouraged from acquiring stocks specifically for the purpose of short-term speculative trading. All purchases of shares should be for medium or long term investment.

source : http://allafrica.com/stories/200803311983.html