Fatwa on Halal Stocks Viewed by
Justice Mufti Muhammad Taqi Usmani

Compiled By:
Prof. Dr. Mohd. Ma’sum Billah
masum2001@yahoo.com
masum@applied-islamicfinance.com
+6019-3699542

Q.) Is it permissible to buy and sell stocks?

A.) A Muslim can acquire the shares of a joint stock company with the following conditions:

1. The main business of the company must be Halaal (permissible) according to Shariah. So, a Muslim cannot invest in a company whose main business is Haraam, like the traditional banks, insurance companies, companies dealing in wines, etc.

2. If the main business is Halaal, but it is involved in borrowing money on Interest or placing its funds in an Interest bearing account a Muslim share-holder should raise his voice against this practice in the annual general meeting of the company.

3. When a Muslim share-holder receives a dividend he must ascertain that proportion of the profit of the company which has accrued on its interest-bearing accounts. Then a similar proportion from his own dividend must be given by him to a person or persons entitled to receive Zakaat.

4. If all the assets of a company are in a liquid form and the company has not yet acquired any fixed assets or any stock for trade, then the sale and purchase of shares must be on their par value only.

If anyone of these conditions is contravened, the investment in a company is not permissible in the Shari'ah.

(Source: Al-Balagh)

Practices made by www.itp.net

Shariah concepts have certainly defined and shaped the way in which Islamic finance has evolved to date. Investors have a choice to invest in one of 9 Dow Jones Islamic Market Indexes, which currently include the DJ Islamic Market Index (DJIM), the DJ Islamic Market Extra Liquid Index, the DJ Islamic Technology Index, the DJ Islamic US Index, the DJ Islamic Canadian Index, the DJ Islamic UK Index, the DJ Islamic Europe Index, the DJ Islamic Japan Index and the DJ Islamic Asia/Pacific Index. Another option is the FTSE Global Islamic Index Series, which has 5 indexes.

Globally, the nine Islamic indexes are comprised of 1,860 companies from 34 countries. If they were an Islamic stock exchange, the nine combined would have a total market capitalization of $11 trillion, second largest after the New York Stock Exchange (NYSE), according to Siddiqui. Islamic indexes track a basket of equities that are Shariah compliant.

The companies are not necessarily Islamic. However, they must meet the threshold that determines if they are halal or compliant with the criteria of Shariah. As is the case with Islamic banks, a Shariah board comprised of scholars must be appointed to screen companies before they become part of a fund or index and review products and services to ensure they are compliant. Different scholars have different opinions that determine which companies are suitable and which are not.

DJIM covers two Muslim countries, Malaysia and Indonesia, and only 7 and 31 companies respectively. Yet, according to Siddiqui, the limited market review implies that even in Muslim countries many of the publicly listed companies are not operating in a Shariah compliant manner. The DJ Islamic Market in the US has 800 listed companies, Canada 97, Europe 429, the UK 138, Japan 188, Asia Pacific 411, Technology 500 and the Blue Chip 100.

For companies to be considered in an Islamic Index, their business activities must be determined suitable and compliant with parameters set by the Shariah supervisory board. In order for a company to be listed in a fund and its shares bought and sold, it should neither borrow money on interest nor gain interest from the money it deposits. An operation that is involved with an interest related activity or riba disqualifies insurance companies, as well as commercial, and merchant banking entities. Other companies that are excluded from a fund include those that manufacture or sell pork, alcohol, and defence weapons, or engage in entertainment industries such as pornography, hotels and gambling or are involved in anything that is contrary to or violates Shariah.

In addition to filtering out companies according to business activities, companies are also screened according to several financial ratios that determine if a company is too leveraged in proportion to its total assets. DJIM, for instance, omits companies whose total debt to total assets ratio exceeds 33%; those whose accounts receivable to total assets is greater than or equal to 45%; and if total cash and interest bearing securities to trailing 12 month average market capitalization is equal to or greater than 33%.

However, exceptions apply to those companies that comprise of permissible and non-permissible activities. According to the Securities Exchange Commission of Malaysia, the core activities of the company should not violate the already mentioned criteria and the element of the business that is not halal or is haram should be very small compared to the core activities. Public perception or the image of the company must be good; and the core activities of the company should have importance and maslaha (benefit in general) to the Muslim Umma (nation) and the country. The haram element should be very small and involves matters such as umum balwa (common plight), uruf (custom) and the rights of the non-Muslim community, which are accepted by Islam.

Islamic Indexes have at times outperformed their conventional counterpart indexes. There is a high correlation between Islamic indexes and their non-Islamic counterparts, according to Siddiqui. In 1999, all but one of the DJIMS outperformed their conventional counterparts, according to Siddiqui, the exception being the DJIM-TECH (84%) to the NASDAQ (86%). However, recent market volatility has affected performance.

The DJIM has put a cap of 10% on any one company in each index to minimize any overriding influence a company may have and to prevents indexes from being dominated by large stocks.

Those developing Islamic products and funds include some of the 200 existing Islamic banks as well as conventional banks like Al Baraka Islamic Bank, Al-Rajhi Banking and Investment Corporation, TAIB Bank of Bahrain, National Commercial Bank of Saudi Arabia, Shamil Bank, and National Bank of Kuwait. The recent growth of Islamic finance and the estimated untapped capital in billions of dollars has also attracted Citibank, Hong Kong & Shanghai Banking Corporation, Bank of Tokyo, Union Bank of Switzerland, Brown Brothers Harriman, Commerzbank and many others.

Some Islamic funds are structured in a similar technique like that of conventional funds. They carry a load fee, also known as a sales charge. According to Siddiqui, Islamic funds may be more expensive compared to conventional counterparts with similar investment objectives.

PRACTICES BY KLSE-KLSI

COMPONENT STOCKS

In classifying the securities as approved securities, the SAC applies a standard criteria which focuses on the core activities of the companies listed on the KLSE. Hence, companies whose activities are not contrary to the Shariah principles will be classified as approved securities.

Securities will be excluded from the list of approved securities based on the following criteria:

As for the companies whose activities comprise both permissible and non-permissible elements, several additional criteria are applied:

Approved securities include ordinary shares, warrants and transferable subscription rights (TSRs). This means that warrants and TSRs are classified as approved securities from Shariah perspective provided the underlying shares are also approved. On the other hand, loan stocks and bonds are non-approved securities unless their issuance is based on Islamic principles.

The list of Shariah Approved Securities are updated by the SAC twice a year. Changes to the components of the KLSE SI are undertaken accordingly and reflected in the index on the effective date of change.