The Decision of the International Islamic Fiqh Academy & The European Council for Fatwa and Research on Stock Markets and Their Applications
The Members of the Council discussed the topic of stock markets (bourse) and the applications practiced in them, and dealing with the shares of stock companies and listened to the Shar`i as well as the economic studies submitted by some of the members and the discussions made about them. The Council then decided the following:
The European Council for Fatwa and Research (ECFR) confirms decision (7/1) 63 taken by the International Islamic Fiqh Academy concerning stock markets, adding some Shar`i viewpoints the Council chose, as follows:
The Decision of the International Islamic Fiqh Academy
A. Shares/stocks
1. Participation in companies
a. Since dealings are lawful in principle, the establishment of stock companies that have lawful objectives and activities is permissible.
b.There is no controversy about the prohibition of participating in companies whose basic objective is prohibited, such as dealing with interest or producing and trading prohibited products.
c. In principle, it is forbidden to invest in stocks of companies that sometimes deal with prohibited transactions, such as interest and others, although their main line of business is lawful.
A complementary decision taken by the ECFR
Concerning the Muslim minorities in the West-where there are no Islamic institutions or companies that have lawful objectives and activities-the ECFR decides that "there is no objection to their dealing with the shares of stock companies whose main objective is lawful and that avoid unlawful lines of business, such as breweries, pork, and gambling, even if these companies have interest-based deposits or loans or unlawful subordinate assets, provided that one observes the conditions set up by the Shar`i committees and by the fatwa given in the banking forums. They are as follows:
1. The loans from conventional banks should not exceed one-third the assets of the company.
2. The interest earning must not make more than 5 percent of net earning.
3. The unlawful assets should not exceed 10 percent of the total assets, provided that one should get rid of the interests and unlawful earning, whatever their proportion may be, through disposing of them for charitable purposes and that the circulation, in the case of increase in kind assets and benefits, should be confined to debts and cash.
One should refer to the institutions approved by the legal (Shar`i) agencies to classify the acceptable companies, such as Islamic Dow Jones Index, which is approved by the Shar`i agency of the index and others.
2. Underwriting
Underwriting is an agreement by a person to purchase all the remaining shares that are not purchased by existing stockholders. This is not forbidden according to Shari`ah if the agreement is to purchase the shares at the nominal value without any compensation for that agreement.
It is permissible for the committed person to receive compensation for an action he performs-other than underwriting-such as preparing studies or marketing shares.
3. Paying the value of the share in installments on underwriting
It is not forbidden in terms of the Shari`ah to pay an installment of the value of the share(s) and postpone the payment of the other installments, for this is regarded as participation in what is paid in advance and the promise to increase the capital. This entails nothing unlawful because this covers all the shares, and the company remains responsible with all its declared capital before the others, for it is the amount agreed upon and known by the parties dealing with the company.
4. Bearer shares
Since a bearer share is a common portion of the assets of the company, and the share certificate is a document to confirm this right in the portion, it is not forbidden in terms of Shari`ah to issue and circulate shares in the company in this way.
5. The role of the contract in selling shares
The role of the contract in selling shares is the common portion in the assets of the company, and the certificate of the share is a document securing the right in that portion.
6. Preference shares
It is impermissible to issue preference shares with financial properties that lead to guaranteeing the capital, a minimum return, or priority in paying at time of liquidation or on distributing the profits.
It is permissible to give privileges related to procedural or managerial matters to some shares.
7. Dealing with the shares usuriously (i.e., in a riba-based manner)
a. It is impermissible to buy shares with a riba-based loan offered by a broker or somebody else to the buyer in exchange for mortgaging the share, because this involves riba and documenting it through the mortgage, and both deeds are unlawful in the light of the text that curses the eater of riba, the one offering riba, the one that writes the contract for riba, and the two witnesses to it.
b. It is impermissible also to sell a share the seller does not possess, but the seller is promised by the broker that the latter will lend him the share at the time of delivery, for this belongs to the case of selling what the seller does not possess. The prohibition is stressed if the seller stipulates that the value be given to the broker to benefit by it through depositing it on interest to obtain compensation for lending.
8. Selling or mortgaging the share
It is permissible to sell or mortgage the share but in conformity with the rules of the company's system, such as allowing the sale unconditionally, or conditional on observing the priority of the old shareholders to purchase the share. Similarly, allowing the partners to mortgage the common portion depends on referring to this in the system.
9. The issuance of shares with issuance fees
It is not impermissible in terms of the Shari`ah to add a certain proportion to the value of the share to cover the expenses of issuance, as long as this proportion is appropriately estimated.
10. Issuing shares with issue bonus or issue deduction
It is permissible to issue new shares to increase the capital of the company, if they are issued at the actual value of the old shares (according to the experts' assessment of the assets of the company) or at the market value.
11.The guarantee of the company to buy the shares (the ruling on which was postponed in the decision of the Academy)
The European Council for Fatwa and Research resolves that it is permissible for the company to issue an obligatory promise to buy the shares from some of their bearers during their period or on liquidation at the market value or at a value agreed upon on purchase. It is not permissible to promise to buy at the nominal value.
The rest of the decision of the Islamic Fiqh Academy, which the Council confirms:
12. Determining the liability of the limited-stock company
It is not forbidden in terms of Shari`ah to establish a stock company with liability limited by its capital, for this is known to those who deal with the company, and due to this knowledge those who deal with the company become free from gharar (risk).
Nor is it impermissible in terms of Shari`ah for the liability of some shareholders to be unlimited in respect of the creditors without receiving compensation for this commitment. This is in companies including cooperative partners and partners with limited liability.
13. Confining the circulation of the shares to authoritative brokers and stipulating fees for dealing in their markets
It is permissible for the relevant authorities to regulate the circulation of some shares, such as confining them to special brokers with permits to do the job, for this is among the official procedures that realize some legitimate interests.
B. Option trading
1.The nature of the contract
Option contract means substitution for commitment to sell something well defined, or buying it at a specific price during a certain period of time or at a certain time, either directly or through an agency that guarantees the rights of both parties.
2. Its ruling in terms of Shari`ah
Option contracts-as they are dealt with nowadays in the international stock markets-are innovated contracts that do not belong to any category of the known contracts of the Shari`ah. Since the contract does not involve a fund, a benefit, or a financial right that can be substituted for, the contract is impermissible in terms of the Shari`ah; and as such contracts are initially impermissible, they are impermissible to circulate.
C. Dealing with goods, currencies, and indices in organized markets
1. Goods
Goods are dealt with in organized markets in one of the four following methods:
a. That the contract includes the right of the immediate delivery of the salable articles and the value, and the goods or receipts representing them should be in the possession of the seller and his hold. Such contract is permissible in terms of the Shari`ah with the known conditions of selling.
b. That the contract includes the right of the immediate delivery of the salable articles and the value, and the possibility of the delivery thereof being guaranteed by the agency of the market. Such contract is permissible in terms of Shari`ah with the known conditions of selling.
c.That the contract is for delivering a defined article in one's debt at a deferred date and paying the value on delivery, and that it includes a condition that the contract ends upon delivery and receipt. This type of contract is impermissible because of the determent of the two exchanged things. This contract can be amended to comply with the known conditions of salam (full payment at the time of the contract) whereupon the contract becomes permissible. It is also impermissible to sell an article that is bought by salam before receiving it.
d. That the contract is for delivering a defined article in one's debt at a deferred date and paying the value on delivery, without including a condition that the contract ends upon delivery and receipt of the article, but can be settled with an opposite contract. This is the more common type in the goods market, and it is primarily impermissible.
2. Trading currencies
Trading currencies in the organized markets is practiced in one of the four abovementioned methods followed in trading goods. It is impermissible to purchase or sell currencies according to the third and fourth methods.
As to the first and second methods, it is permissible to purchase and sell currencies conditional on observing the known conditions of sarf (currency exchange).
3. Dealing with the index
The index is a calculation, by a special statistical method, to find out the size of change in a certain market; dealings with it are carried on in some international markets. It is impermissible to buy or sell the index because it is pure gambling, and it is just the process of selling something imaginative that cannot exist.
The Shar`i alternative to unlawful transactions in goods and currencies
An Islamic market for goods and currencies should be organized on the basis of dealings permitted in the Shari`ah, particularly bay` al-salam (payment in advance), sarf (currency exchange), promise to sell at a deferred date, and istisna` (custom order).
The Council opines that it is necessary to undertake a comprehensive study of the conditions of these alternatives and the methods of applying them in an Islamic organized market
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