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Is Investing In Stocks Halal?
Does Islam allow Muslims to buy and invest in stocks of publicly traded or private companies? Even if those companies invest some of their cash reserves in banks and gain fixed interest from it.
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24 Replies
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Is Investing In Stocks Halal?
updated 4 years, 5 months ago
7 Members
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24
Replies
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Salam Zohaib sb – I’d consider it to be two separate issues.
a) Investment in stocks (in principle)
b) Evaluation of financial assest management, business model and other relevant practices of the company/symbol in question.
If this makes sense, I can address point a) related to stocks invesment. Pls. let me know. Thanks
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Wassalam @Sohail – agreed that breaking this question up into the two separate issues makes sense. I am personally more interested in understanding issue (b), which is around evaluating which companies am I allowed to invest in by purchasing stock? What rules or principles do I need to weigh a company’s financials against to determine whether investing in that company’s stock will be considered Halal.
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On a basic level you can check what type of products or services are offered by the company you are interested in. List out what you consider unethical like nightclubs, pornographic services, winery, casinos (huge list based on your sensitivity) – this could be a basic check. As an outsider you are typically not aware of internal dynamics & operations of a firm, neither it should concern you IMO but if there are any known red flags that are in public knowledge, sure count that in also.
In general, stock investment criteria is no different than any other investments you do.
Hope it helps!
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There are standards defined by AAOIFI on screening the stock for sharia compliance and there are apps that can help with this like Zoya app.
Check out the discussion here:
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Thanks, defining standards is one thing and following is another. I am sorry, I don’t know what other “Sharia compliant” services are out there to suggest “Muslim” stocks. This is above my pay scale!
“The AAOIFI triggered controversy in 2008 when it claimed that more than 80% of sukuk issued did not comply with Sharia principles and tightened the standards that sukuk must meet to comply with Sharia. However, despite this announcement, sukuk are still being issued that may not comply with the AAOIFI’s strict standards.”
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Thanks. I reviewed the AAOIFI standards explained in the attached document. Page 563 of the document lists out the main screening criteria for what company’s are allowed to be invested in. I’ve copied those criteria below. I am curious how these criteria were determined in light of the Quran and Sunnah. What verses of the Quran or practices of the Prophets can be used to support these criteria.
3/4/1 That the corporation does not state in its memorandum of
association that one of its objectives is to deal in interest, or in association that one of its objectives is to deal in interest, or in
prohibited goods or materials like pork (swine) and the like. prohibited goods or materials like pork (swine) and the like.3/4/2 That the collective amount raised as loan on interest – whether
long-term or short-term debt – does not exceed 30% of the long-term or short-term debt – does not exceed 30% of the
market capitalization of the corporation, knowingly that raising market capitalization of the corporation, knowingly that raising
loans on interest is prohibited whatsoever the amount is. loans on interest is prohibited whatsoever the amount is.3/4/3 That the total amount of interest-taking deposits, whether
short-, medium- or long-term, shall not exceed 30% of the short-, medium- or long-term, shall not exceed 30% of the
market capitalization of total equity, knowingly that interest- market capitalization of total equity, knowingly that interest taking deposits are prohibited whatsoever the collective amount taking deposits are prohibited whatsoever the collective amount
is.3/4/4 That the amount of income generated from prohibited component does not exceed 5% of the total income of ed component does not exceed 5% of the total income of
the corporation irrespective of the income being generate- the corporation irrespective of the income being generated by undertaking a prohibited activity, by ownership of ed by undertaking a prohibited activity, by ownership of
a prohibited asset or in some other way. If a source of income a prohibited asset or in some other way. If a source of income
is not properly disclosed then more effort is to be exerted is not properly disclosed then more effort is to be exerted
for identification thereof giving due care and caution in this for identification thereof giving due care and caution in this
respect. -
Salam – This is AAOIF’s ijtihad, they are the ones who should provide justification for their criteria. I hope it make sense. Thanks for all the good questions!
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@Sohail saab I don’t think Islam has any prohibitions on investing in stocks – as long as they are of companies doing ethical businesses. I would be interested in finding out about how to deal with such investments where these ethical companies also invest some of their cash in fixed income securities.
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Agree 100%, that is why I suggested to break down the issue into
a) Stock investment (Allowed in principle – Zakat on dividends) Discussion 1095
and
b) Due diligence before investing in a symbol (stock)
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@faisalharoon sb. I think principally it is no different than buying insurance–as in– the insurance premium paid is collected in a pool and then invested as per financial management policies of that insurance company, some of those investments would be in fixed income securities. When an insurance triggering event happens and we claim our insurance, the insurance amount would include a combination of both the amount from the insurance premium pool and share of profit earned from those fixed income securities (not always, but in theory it does). In that case, Ghamidi sb. is of point of view to which I agree that financial asset management policies of insurance company are not primarily our concern as the primary activity is free from any ethical stain. The same can be applied to stock investments in my opinion, as long as the primary activities of the company fall within the framework of ethical activities, their financial management policies should not be our primary concern. This doesn’t mean that we should not strive to make their financial management policies interest-free.
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Also another relevant question is: after we screen a stock to be shariah compliant, is it permissible to do day trading? Buying and selling stocks same day purely based on price movement and pricing charts.
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Salam – In principle trading stocks is perfectly fine, short or long positions (in ownership) is mainly your personal preference on how you want to structure your overall portfolio & how diversified it should look like at any given point – Cash, Stocks, Options, ETFs, Crypto so on and so forth. Short and long positions can change & evolve w/ your financial objectives.
I personally do not like short selling stocks because objective in this trade is not to invest in the profitability of a company instead you are betting to make a profit if company performs poor or goes under. This is my personal preference – Short selling not allowed by my zameer!
Hope it helps!
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@Sohail “Short selling not allowed by my zameer”
In short selling you are borrowing a stock from your broker and selling it to a buyer, hoping that you’ll be able to buy it cheaper before returning it to the broker. Essentially, you’re selling something at the market price and buying it back at a later time for a lower price. How is this any different from a shopkeeper who doesn’t own a particular color of a shirt so he borrows it from the next door shop and sells it to the customer. Then at a later time he pays a cheaper price to the next door shop?
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going back to @faisalharoon question. Most if not all companies, earn interest on their working capital. Is it permissible to buy stocks of companies that earn interest on their working capital, if yes, what are the arguments in support of it? Seems like, AAOIFI, says that if interest income is less than a certain percentage of the total income then it is OK. Not sure what is their supporting argument for their position.
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I dont find this argument/criteria convincing “less interest is Halal” or “few drinks/sips of wine are ok”.
This argument makes no sense to me!
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agreed. So, basically if companies get some of their income from interest, regardless how small that amount is, then investing in that company is not permissible? This will mean that investing in large percentage of publicly traded companies is not permissible, as they earn money on their working capital.
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That is not what I meant. I meant AAOIFI criteria makes no sense. Thanks
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Page 141-143 of this book from Taqi Usmani tries to address this topic. https://muftitaqiusmani.com/en/books/PDF/An%20Introduction%20To%20Islamic%20Finance/An_Introduction%20_to_Islamic_Finance.pdf
would love to hear people’s opinion on this line of thinking.
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I think the very first thing to establish would be whether or not interest and riba are one and the same.
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@faisalharoon do you have any thoughts on Riba and Interest
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@Fayyazshah bhai in my understanding riba and interest are not the same. All riba is interest but not all interest is riba. Riba is just one application of the principle prohibition stated in the Quran 29:30 about not consuming the wealth of others unjustly.
Conditions of riba are:
a. A person in need borrows a consumable product (money, grain, etc.)
b. The lender lends only on the condition that the borrower must return an additional amount over and above the borrowed amount after a certain period of time.
In this situation the lender is setting the terms and putting an undue burden on the borrower of not only reproducing the borrowed amount of a consumable item, but also an additional amount of the same. In many cases the terms of the loan are such that the lender knows in advance that the borrower will never be able to pay it back in full. He’s in fact counting on it, and hoping to have a residual income for the rest of his life and perhaps even for his generations to come. This kind of a transaction is immoral to say the least.
When a company puts money in the bank and earns interest:
a. It’s not a loan transaction.
b. The bank (the receiving party) is the one setting the terms.
c. There’s no genuinely needy party in the picture.
d. The interest paid by the bank to the company can change, or even go to zero, at the will of the bank (the receiver).
d. Nobody is unjustly consuming the wealth of another.
Interest and riba are materially not the same, hence I find no harm in investing in moral and ethical companies that earn some of their income from interest. There are still companies out there that are involved in the business of riba, e.g. payday loan companies, title loan companies, etc., and we should definitely stay away from them.
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I agree with the stance that there is no harm if companies earn a small portion of their club one through interest and as long as that’s not their major source of revenue.
What about credit card companies? They are heavily based on riba model, right?
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In my personal view most reputable credit card companies look for the credit history of a person before extending credit to him – they’re not deliberately looking to exploit people who can’t pay back. Also most of them offer you a reasonable period to pay back the full amount without any penalty, hence part (b) of my conditions above is not fulfilled. Even when a person needs a month or so of extra time to pay back, they charge only a fair amount in most cases. Of course if a person himself acts recklessly with his credit, he has to pay a hefty price – but can you really blame the credit card companies for that? They even write off the debt if the borrower dies or files for bankruptcy rather than trying to recover their money from his children or relatives. Where is unjustly consuming another person’s wealth in this whole picture? If anything it’s on the borrower’s side!
All that said, I still have never bought or sold a single share of a financial company ever, and will probably never do so. But that’s just my personal preference.
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Great explanation. Thanks!
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