Shari’ah Standard (Halal) of Stocks in the Capital Market

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

INTRODUCTION

Any activities concerning Muslims, including business activities and other pave ways of money generation, should be in accordance with the Islamic disciplines, rules and regulations. In one hand, Islam permits money-generating activities; while in the other, it sets certain regulations, which are apt for the betterment of Muslims and humanity in general. Together, both hands are capable of bringing about prosperity into this world, the Islamic way.

Money managements involving usury and gambling; manufacturing and/or selling of forbidden products (for example, liquor, pork and pornography related materials); and engaging in operations surrounding the elements of uncertainty and cheating (like the traditional insurance practices) are forbidden by the Shari’ah. These activities are considered as un-Islamic in nature, as regulated by the Shari’ah frameworks. Furthermore, neither stock market nor other related money matters are excused from the Islamic Shari’ah principles. As a consequence, the stocks and shares of companies involving in the above-mentioned practices are deemed non-halal. But, what if the core business of a company is halal in nature, while a smaller portion of the business activities are not align with the Shari’ah principles? Are Muslims then prohibited to invest in such a company?

Besides attempting to provide answers to the above questions, this paper will first give a brief overview of the Malaysian capital market followed by the step-by-step process of evaluating companies for the purpose of determining whether or not a company’s stock is considered as halal. Then, we will look at the criteria of unapproved stocks, that is, stocks which are not allowed to be purchased by Muslims because of their un-Islamic nature. Subsequently, we will discuss the case of investing in mixed companies (companies which are involved in both halal and non-halal activities). Finally, some Shari’ah related issues on stock trading and practices such as preference shares, contra trading, insider trading, margin trading and short selling of stocks are discussed.

OVERVIEW OF THE MALAYSIAN CAPITAL MARKET

The following are the instruments in the Malaysian capital market and their relative governing bodies:

Stocks are traded on the Kuala Lumpur Stock exchange (KLSE) and Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ). Orders to buy and sell shares are routed to the Securities Clearing Automated Network Services Sdn Bhd (SCANS); SCANS plays a role in the delivery and settlement of shares, and also in receiving and paying of amount payable to or by broking firms. On the other hand, the issuing house facilitates the issuance of new shares for sale to the public. To trade in the KLSE listed companies, a person has to first open a trading account and a Central Depository System (CDS) account with one of the stockbroking companies. The CDS uses book entry system to keep track of movement of shares traded; thus, no physical delivery of shares is present under the CDS.

While the Bank Negara supervises the trading of bond securities, the Malaysia Derivatives Exchange Bhd (MDEX) facilitates the trading of the following contracts that are traded on an electronic screen based system:

The Malaysian Derivatives Clearing House (MDCH) on the other hand plays a role in registering, monitoring, matching, guaranteeing and carrying out the financial settlement of futures and options transactions traded on the MDEX.

PROCESS OF EVALUATING STOCKS

There are three categories or status of companies:

Companies under the category of non-permissible (permissible) activities are those who are involved in the non-halal (halal) activities, under the Shari’ah principles. While activities comprise of both permissible and non-permissible activities means that the companies under this categories are performing both halal and non-halal activities.

To determine whether or not a Muslim can buy and sell stocks issued by companies listed in the KLSE, the following process needs to be fulfilled beforehand

Collecting data on stocks or companies

The Shari’ah Advisory Council (SAC) of the Securities Commission (SC) receives input and support mainly from the SC itself. The SC gathers information on companies’ activities from various sources such as annual financial reports, and published information in magazines, newspapers and KLSE references. Apart from that, the SC also conducted surveys and interview sessions with respective companies’ managements.

Evaluation and preparation of report

Upon evaluation of data, if the SAC is satisfied that the evaluated companies are engaging in halal (permissible) activities, then the stocks of these companies will immediately be approved (can be purchased by Muslims); the opposite holds for companies engaging in non-halal activities only. On the other hand, if the companies’ activities comprise of both permissible and non-permissible elements, the SAC will then perform two additional phases of evaluation:

ii) The second phase applies qualitative method of evaluating companies, that is, looking at the society or public perception of the companies, and determining the importance and maslahah (benefit) of these companies to the ummah (nation); the haram element only involve matters such as ‘uruf (custom), ‘umumbalwa (common plight), and fasad al-zaman.

Report will be presented to the Shari’ah Advisory Council Board

After conducting thorough evaluation of companies’ activities, the report will be forwarded to the SAC Board of the SC for approval.

Announcement of Shari’ah approved stocks

Finally, the list of stocks approved as halal by the SAC of the SC will be updated and made known to the public by the Security Commission.

Criteria of Unapproved Stocks

As mentioned earlier, the main criteria for halal stock is that the business of the company issuing the stock must be in accordance with the Shari’ah principles. Stocks of listed companies will be excluded from the list of Shari’ah approved stocks based on the following criteria:

Operations of companies based on riba (interest)

Operations and activities of financial institutions, including commercial and merchant banks, and finance companies are generally known to be based on riba. It is noteworthy to state here that Islam permits increase in capital trough trade. Allah says:

“ O you who believe, do not consume your property among yourselves wrongfully, but let there be trade and traffic by mutual consent…”

At the same time, Islam prohibits anyone who tries to increase his or her capital through lending on riba (usury or interest) whether it is at a low or a high rate. The Holy Prophet (SAW) declared war on usury and those who dealt in it. He said:

“When usury and fornication appear in a community, the people of that community render themselves deserving of the punishment of Allah.”

The main purpose for prohibition of riba in transactions is, it will discourage people from doing good to one another, as required by Islam. If interest is prohibited in a society, people will lend money to the needy at goodwill, that is, expecting the same amount of money lent to be returned by the borrower. If interest is made permissible, the needy will then be burdened by the requirement to pay back more than the amount he or she borrowed. Below are hypothetical examples of companies involving in riba transactions:

Dynamic Finance Berhad is a company, which provides financing to the businessman. The company will charge fixed interest for every loan they provide and interest is the main income for this organization. As a result, Muslims are prohibited to make any investment in this type of company. Allah said in Al-Qur’an:

“…God hath permitted trade and forbidden usury…”

Another example is a company, Mega First Corporation Bhd., which involves in producing textile. At the same time, the company deposits its surplus in an interest-bearing account, and borrowed money (on interest) from Hong Leong Bank Bhd. In this case, according to Justice Mufti Muhammad Taqi Usmani, a Muslim can purchase the shares of joint stock company (mixed company) with the following conditions:

The proportion of dividend attributed to the interest-bearing account must be given to charity and must not be retained by the shareholder. This is called the act of purification or dividend cleansing for Muslim investors who wish to invest in mixed companies (activities involving both halal and non-halal elements).

In order to allow Muslims to invest in mixed companies, different scholars have come up with different percentages of allowable non-Shari’ah compliant sources of income. According to IslamiQ's ScreenIslamiQ methodology, a Muslim investor cannot invest in the shares of a company if the non-Shari’ah compliant sources of income contribute 5% or more of the company's total income. IslamiQ’s ScreenIslamiQ also stated that the shareholder must express his or her disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company. Meanwhile, other scholars think that if a business has 25% or less (some even said 33.3%) of its total income coming from interest-bearing activities, then Muslims are allowed to invest in that business, provided they (the investors) get rid of the interest based portion of the income by giving it away to the poor and needy or for charity.

Operations involving in gambling

Gambling is a clear case of chance transaction whereby there is no possibility of predicting the outcome. The wisdoms behind the prohibition of gambling are as follows:

In one of the hadith reported by Ibnu Majah, Prophet (SAW) said:

“ He who says to his friends, “ Come let us gamble”, must give charity.”

For instance, Genting Highland Bhd. is one of the largest and well-known casinos in the world, and their core activity is totally based on gambling activities. Consequently, Muslim investors are totally prohibited from buying shares of such company. The Islamic teachings urged the Muslims to follow Allah’s directives for earning a living, and clearly, Islam prohibits gambling as a mean of earning a living. Allah said:

“O you who believed! Truly, intoxicant and gambling and divination by arrows are an abomination of Satan’s doing: avoid it in order that you may be successful. Assuredly, Satan desires to sow enmity and hatred among you with intoxicants and gambling, and to hinder you from the remembrance of Allah and from solat. Will you not then desist?”

Operations of companies involving in the manufacturing and/or selling of haram products

In Islam, products such as liquor, pork and meat that are not slaughtered according to Islamic rites are haram (forbidden). Accordingly, trading in these goods is haram. Other examples of haram trading items are idols, crosses, and statues. Permitting the sale or trade of such articles implies promoting and propagating them among people, and consequently encouraging them to do what Islam prohibits. The prophet said:

“surely, Allah and His messenger have prohibited the sale of wine, the flesh of dead animals, swine and idols”.

The Prophet did not stop at prohibiting the drinking of alcohol, whether much or little but he also forbade any trading in it, even with non-Muslim. It is not permissible for a Muslim to import or export alcoholic beverages, or to own or work in a place, which sells them. In connection with alcohol, the prophet (SAW) cursed ten categories of people, saying:

“ Truly, Allah has cursed Wine (Khamr) and has cursed the one who produces it, the one for whom it is produced, the one who drinks, the one serves it, the one who carries it, the one for whom it is carried, the one who sells it, the one who earns from the sales of it, the one who buys it, and the one for whom it is bought.”

This principle also applies to drugs trading because the intoxicating effects of drugs are considered the same as alcohol. Moreover, the deeply addictive nature of drugs, and their effects on ones health, finances, family and society are also reasons why drugs are considered as haram. However, drugs trading are only permissible if the drugs will be use for medication purposes.

Guinness Corporation Sdn Bhd, for example, involves in selling and producing of alcoholic beverages. Thus, clearly, the share of the company is haram and cannot be bought by Muslims investors. Take another example, Garfield Sdn Bhd, a company involving in buying, rearing and selling pigs. It is well known that pork is very dangerous to human. Scientific research has shown that eating pork is injurious to health in all climates especially hot ones. This is because pork carries a deadly parasite (trichina) that could harm those who eat them. In addition to this, there are also some scholars who say that eating pork frequently can diminish the human being’s sense of shame in relation to what is indecent. These are the reasons why Allah prohibits eating pork. Allah (SWT) said: “ Say: “ I find not in the message received by me by inspiration any (meat) forbidden to be eaten by one who wishes to eat it, unless it be dead meat, or blood poured forth, all the flesh of swine, -for it is an abomination-or, what is inspires, (meat) on which a name has been invoked, other than God.””

Operations containing element of gharar (uncertainty)

Gharar or doubtful transaction is the basis for gambling and hence prohibited. A doubtful or uncertain transaction will obviously result in some unfair or unjust outcome to any of the parties involved. For example, insurance against hazards whereby the insured pays a specified premium during the year. If no accident of the type specified in the insurance policy occurs to the property during the year, the company keeps the premiums received and nothing is returned to the insured. If, on the other hand, some calamity occurs, the insured individual is paid the agreed-upon sum. This kind of transaction involves gharar since there is no principle of profit-sharing basis. The doubt or uncertainty here lies in the fact that no one knows whether something may or may not happen . This example again signifies the desire of the Islamic Shari’ah to ensure justice to all parties. It is interesting to note that the Islamic way of establishing justice closes all doors of injustices right from the start rather than to allow it to happen and confronting with the reactions or punishments later.

However, not every sale involving what is unknown or uncertain is prohibited. For instance, a person may buy a house without knowing the condition of its foundation. Here, if the risk of uncertainty can be determined by experience and custom, the sale is not prohibited. In the opinion of Imam Malik, all sales of needed item in which the margin of risk is bearable are permissible. For example one may sell root vegetables such as carrots, onions, and radishes while they are still in the ground. Ibn Taymiyyah said the principle laid down by Iman Malik concerning these type of sales are superior to those of others, because he took them from Sa’id Ibn Al- Musayyib, who is in the best of authority on the fiqh of sales.

Take an example of a company, Doraemon Company Bhd, which is a conventional based insurance company. It offers variety types of insurance schemes such as life insurance, fire insurance, accident insurance and so on. As a result, Muslims investor cannot make any investment in this type of company. Many scholars have held that Insurance, in its present is prohibited, since you are paying money for something that may or may not happen. The insurer takes the premium money, and in most cases gets to keep them all (except for cases when too many claims occurred, the insurer may end up with a loss). This imbalance is unfair, and has led to the prohibition of the present conventional insurance policies. An alternative policy, which is acceptable in Islam, would be the Cooperative Insurance (Takaful) where all participants co-own the pooled premiums. The pooled fund is invested, and any claims from participants are settled using the pooled fund. Any profit from investment (less all claims and allowable costs) is then distributed among the participants at the end of the period or fiscal year.

INVESTING IN MIXED COMPANIES

As in the case of mixed companies, whereby the activities comprise of both permissible and non-permissible elements, the SAC of the SC applied several additional criteria, which are:

There are a number of opinions coming from Muktabar scholars pertaining the issue of mixed companies whereby Muslims and non-Muslims jointly share management of a company:

The rationales behind the approval of making investment in mixed companies are:

“Say: “Shall I seek for my cherisher other than God, when He is the Cherisher of all things (that exist)? Every soul draws the meed of its acts on none but itself: no bearer of burdens can bear the burden of another. Your goal in the end is towards God: He will tell you the truth of the things wherein ye disputed.”

According to Al-Khayyat, the sins of interest in muamalat are the responsibility of the management board. So, the investors do not have to further inquire about this matter.

“…But if one is compelled by necessities, neither craving nor transgressing, there is no sins on him; in deed, Allah is forgiving merciful.’

Furthermore, a legal maxim provides to the effect:

“ If the good and bad things are mixed together then make a considerable decision.”

Therefore, we can see that Islam is actually a very flexible religion and it does not bring about detriments or disadvantages to its worshippers. Even when an item or practise is said to be impermissible in the first place, due to necessities and unavoidable difficulties, for example, the impermissible can then be made permissible, but careful and thorough evaluations need to be done in advance. Furthermore, in Islam, the impermissible can be made permissible if the benefits are greater than the harmful effects arising from the non-halal elements.

METHOD FOR EVALUATING MIXED COMPANIES

The evaluation of mixed companies involves two stages:

For further understanding, some cases are highlighted bellow:

The first case involves a holding company, Ladang Utama Berhad, whose core activities are in the area of plantation and investment. On the other hand, its subsidiary, Gaming Bhd is involved in gambling activities. The following are the information obtained from the accounts of the holding company and its subsidiary:

ISSUES PERTAINING STOCKS

Gambling in the stock market

Some people believe that the stock market is a place where they can try their luck and gain substantially from the increment in stock prices, just like spending money in casinos. They think that all they have to do is just to purchase any stock they want and then sit back and wait, hoping for the profits to come rolling into their pockets sometime in the future. If this is the case, then trading in the stock market is prohibited according to the Shari’ah principles.

The question now is, are all activities in the stock market similar to gambling activities? Although one may gamble in the stock market and gain from buying and selling of stocks, in the long run the gambler will always lose. With this in mind, anyone who wishes to participate in the stock market should prepare oneself with the knowledge and ability to analyse the market trends and financial data of companies in order to reduce the level of uncertainty of stock price movements and to gain from buying and selling of stocks. Therefore, in contrast to a gambler’s behaviour of waiting and hoping for stock prices to increase, a true investor would have analysed all available data to derive the intrinsic value of stocks and to predict the future movements of these stocks. The investor would then choose stocks, which have high probability of bringing value to his or her investment. Whilst a gambler is uncertain as to whether or not his or her stocks will appreciate or depreciate in value, a true investor is exceptionally certain that his or her stocks will indeed produce future returns. As a result, trading in the stock market is lawful under Shari’ah principles provided that proper evaluations had been carried out prior to purchasing of stocks, and the intention to trade must not be the same as the case of gambling.

Speculation in the stock market

Aggressive strategy for investing in the stock market, that is, actively buying and selling of shares for capital gain is perceived as speculation per se. This is the reason why some Islamic scholars only approve purchasing of stocks for long-term investment; they view capital gains arising from such transaction as un-Islamic. However, Datuk Dr. Syed Othman Alhabshi argued that in any business venture one has to indulge in speculation, which is based on some prior fundamental knowledge. For example, when a person wishes to start a grocery store in a new housing area, that person would have predicted that there will be potential customers in that area, thus, giving income and profit for his business. This is actually an example of speculation but the kind, which is allowable in Islam. The kind of speculation that is unlawful in the eyes of Islam is when a person tries to outperform the others, and as a result doing harm to other people.

Referring back to the situation of aggressive buying and selling of stocks for capital gain, if adequate analysis had been carried out and if this strategy proves that there is no harm done to the rest of the stock market players, then by all means, this is acceptable in Islam. Take for example a grocery shop, where the turnover is very high. The owner buys groceries in the market at a cheaper price and sells to customers at a profit. Because of the high demand for groceries, in a day, the owner frequently visits a nearby market to restock items on the shelves. Consequently, the buying and selling activities for profits are aggressive in nature. Islam views this practice as acceptable; hence, this should also hold for buying and selling of stocks for capital gain. Datuk Dr. Syed Othman Alhabshi said that the buying and selling of shares for capital gains is completely legitimate because it is a form of business transaction involving in buying and selling of certain right over a company. He further added that when trading in stocks, one is neither dealing with interest-based transactions nor a doubtful one because the participant knows exactly what he or she buys and at a price he or she bargains for.

There are a few stock trading practices, which are perceived as un-Islamic, namely contra trading, margin trading and short selling of stocks. This is because these practices are seen to be speculative in nature. For example, in the case of contra trading, when an investor orders a remisier or dealer to buy shares, he or she has a few days to settle the payment. Within this period, the investor might choose to sell the shares, before settling the payment due for the purchase of the stocks. If selling of the stocks produces profit (selling prices higher than purchasing prices), then the brokerage firm will pay the investor but if losses arise (selling prices lower than purchasing prices), then the investor will have to settle the differences. Some Islamic scholars hold that such trading is prohibited because it involves the element of gharar (uncertainty) and the payment for the purchase of stocks is yet to be settled.

However, other scholars view this transaction as permissible because when an investor orders the purchase of stocks through intermediaries, the order will be keyed into a system at the stockbroking company. The order will then be relayed through the system to the central computers in KLSE (for investment in stocks in Malaysia) and an order conformation will immediately be routed back to the stockbroking company; trade conformation will then be printed out at the broker’s office and the investor will then be notified. Therefore, the purchasing contract had already been concluded and the shares do belong to the investor; the only contract outstanding is the debt payment from the investor, which is a separate contract from the purchasing of stocks. Since the stocks belong to the investor, he or she has the right to keep or sell the stocks. In order to avoid defaulting on the payment, Datuk Dr. Syed Othman Alhabshi suggested that it would be preferable if investors can provide sufficient financial backing when they want to engage in contra deals.

In the case of margin trading, an investor purchases stocks by paying part of it in cash and borrowing the remainder from the brokerage firm at the margin interest rate. This practise is clearly not legitimate from an Islamic point of view because of the interest element in it. However, if the interest element can be eliminated, then such a practise is allowed. For instance, Bank Islam Malaysia Berhad tries to overcome this issue through the introduction of share financing, which adopts mudaraba profit sharing principles. The stockbroking companies can also make margin trading legal by replacing the interest element with the principles of mudaraba.

The other Islamically controversial stock-trading practise is the short selling of stocks. Under this practise, when a person foresees that a share price will fall, that person will order his or her remisier or dealer to sell the shares of the company, even though he or she does not own the shares. Later, when the price of the shares does fall, that person will purchase the stocks and close its position. This practise is clearly prohibited under the Shari’ah principles because it involves the selling of something, which the seller does not own. Some would say that this practise resembles a salam contract whereby a commodity can be sold for future delivery. Under the salam contract, the vendor has to have paid in full for the commodity in advance, but under short selling of stocks, the purchase price is not yet known and thus cannot be paid in full. Therefore, under the Shari’ah principles, this kind of stock trading practise is prohibited due to the high level of uncertainty attributed to it.

Another issue worth mentioned under this heading is regarding insider trading activities whereby some investors obtained information, which is not easily and freely available to the rest of the stock market participants. In general, this kind of activity is prohibited under the Shari’ah because the use of privileged information enables the well-informed participants to make profits at the expense of other investors. The well-informed investors are able to manipulate the stock market in order to gain hugely from it, while causing other players to be at an unfavourable position.

Preference shares

According to SAC of the SC, the approved securities include ordinary shares, warrants and transferable subscription rights (TSRs). This means that warrants and TSRs are classified as approved securities from the Shari’ah perspectives, provided the underlying shares are also approved. On the other hand, the preference shares are non-approved securities according to the SAC and many Islamic scholars.

In terms of risk, the preferred stockholders are in a less risky position than the ordinary shareholders Preferred stockholders generally receive greater return on their investment compared to ordinary shareholders. All profits will first go to the preference shareholders according to the specified dividend rate. The remaining profits, if any, will then go to the ordinary shareholders. Even if dividends on preference shares are not given out in a particular year, the preferred stockholders are not at a lost position; they will be paid in later year (plus the dividend attributed to the current year) when the company earnings permits.

Preference shares are also given priority over ordinary shares as to the claims on company assets upon winding up of the company. Thus, in case of liquidation, the secured creditors such as bondholders is paid first, followed by preference shareholders who are paid the nominal value of their shares. Ordinary shareholders on the other hand will only receive the remaining amount available. Therefore, we can see that the preference shareholders may receive the full par value of their shares, whereas the ordinary shareholders might not. From fiqh point of view, if the preferred stockholders are to be considered as lenders, they may not receive dividend in the first place; they can only get back their principal amount lent to the companies. Alternatively, if they are considered as partners, they may not have preference over other partners, that is, the ordinary shareholders.

According to Muhammad Anas Zarqa’, a professor at the centre for research in Islamic Economic, King Abdulaziz University, Jeddah, Saudi Arabia, several fiqh rulings are crucial to establish the Shari’ah acceptability level for preference shares. Firstly, it is permissible under a partnership to agree on a profit sharing ratio, which is different from the ratio of capital invested by the partners. This rule, in strict interpretation, applies only to partnership where each partner provides some capital and some labour. The second ruling stated that it is the permissible to make the profit sharing ratio in a partnership variable, depending on the level of realized profits. This second ruling was approved by the Shari’ah Board of the Faisal Islamic Bank of Sudan.

The shareholders, both ordinary and preferred are free to agree on any variations of the profit sharing ratios, which are different from the ordinary level (the level that corresponds to the capital investment of ordinary vs. preferred shares). The only limitation is that the profit sharing ratio must be maintained among all groups of shareholders. In other words, what must be avoided is a situation where almost all profit goes to only one group of shareholders. As a result, it should not be objectionable under the Shari’ah principle for a group of ordinary shareholders to give up to two thirds of their profit to another group of preferred shareholders.

Stock hedging

Hedging is a useful tool for managing risks associated with the price fluctuations of share prices. Stock index futures for example, is a good hedging tool for diversified market investors because futures prices are highly correlated with the underlying market. However, the stock index futures do not have clearly defined underlying asset, thus making this tool impermissible under the principles of Shari’ah. In addition, this practise is unacceptable because futures allow hedgers to transfer risks to speculators; hence, futures depend on speculation. As discussed above, speculation does not necessarily portray negativity. When speculators are capable of gaining something at the expense of others, then only Islam prohibits such action. In the case of futures, speculators assume the risk of price fluctuations that hedgers try to avoid, and without the existence of speculation in the stock index futures, this tool is difficult to be put into practise. Thus, speculation in the futures has a high level of uncertainty and the speculators, in general, are willing to absorb excessive risks, hoping that they will be rewarded highly. This is akin to gambling. As a result, under the Shari’ah principles, the stock index futures is an unacceptable tool for hedging. Aside from that, Justice Mufti Muhammad Taqi Usmani also said that in most futures transactions, the delivery of the commodities and their possession is not intended, thus the parties end up with the settlement of difference of price only, which is not allowed in Shari’ah.

In the case of stock options, the buyer of the option has the right, but not the obligation, to buy or sell the stocks, whereas the seller of the option must sell or buy the stocks, if the buyer chooses to exercise his or her option. Some scholars stated that this practise is unacceptable because of the speculative activities attributed to it. Furthermore, Justice Mufti Muhammad Taqi Usmani also said that options are not permissible because the promisor (the obligated party) cannot charge the promisee (the buyer of the option) a fee (premium paid by the promisee) for making such a promise. However, scholars in favour of stock options stated that, as oppose to futures, the underlying asset could be determined under stock options, thus making this kind of transaction more certain. Furthermore, the premium paid could also be seen as a contribution by the promisee to the promisor for his or her willingness to do business with the promisee, instead of viewing it as a fee imposed by the promisor. The premium is a mean of protection to the seller of the option from incurring unlimited losses. In Malaysia for example, the Muslim scholars do allow both put and call options associated to stocks that are halal in Islam.

SHARI’AH ADVISORY COUNCIL OF THE SECURITIES COMMISSION

In Malaysia, as mentioned above, the authority responsible for the determination of halal Stock is the Shari’ah Advisory Council (SAC) of the Securities Commission (SC). The SAC was established on 1 st July 1996 and among the functions of SAC are:

Some of the efforts that have been carried out by the SAC of SC are:

The SAC of SC members for the year 2000-2002 are:

CONCLUSION

As can be seen above, we believe that the SAC of SC are quite lenient in determining the approval of halal stocks. This can be proven by looking at the additional criteria outlined by them to evaluate companies that comprise of both halal and haram activities. It is undeniable that in modern age the practice of riba and bribery cannot be avoided (umum balwa). However, in the case where a particular company involves in haram activities with regard to gambling and liquor, we disagree with the present rulings outlined by the SAC. Our justifications here are based on several evidences:

“ They ask thee concerning wine and gambling. Say: O Prophet, in them is great sin and some benefit for human being but the sin is greater than benefit.”

Therefore, it is seen that the sin of the haram is not limited to only the person who engages in it, but it extends to others who support it materially or morally; each participant is held accountable according to his or her share.

“The halal is clear and the haram is clear. Between the two, there are doubtful matters concerning which people do not know whether they are halal or haram. One who avoids them in order to safeguard his religion and his honour is safe, while if someone who engages in a part of them he may be doing something haram…Truly, every king has a hima (preserve), and the hima of Allah is what He has prohibited.”

Gambling and alcohol are proven to bring more harm than benefit to people and nation. When it comes to these two haram items, the indulgers are at loss, materially and morally. As a consequence, social problems like shattering of families and businesses, child abuse and theft occurred. Hence, we suggest that stocks of companies involving in these two activities, be it significant or insignificant, should not be allowed to be purchased by Muslims.

Muslims cannot afford to ignore the capital market because the private sector, which holds a nation’s power are made up of entities that are naturally controlled by the shareholders, and ignoring the capital market implies ignoring the economic power of private sector and its attendant power of wealth creation, employment and training opportunities, control of economic knowledge and technology, and global economic relations.

As a result, attempts are made to develop Islamic capital markets to cater for the demands from local as well as foreign investors who seek to invest in securities based on Shari’ah principles. The Kuala Lumpur Stock Exchange Shari’ah Index (KLSE SI) and the Dow Jones Islamic Market Indexes are examples of such attempt. However, there remain issues on stock trading practises in which Islamic scholars are still not unanimous as to the validity of such practises. Examples are the contra and margin trading and options on stocks. Despite the ongoing debates, in Malaysia, the Islamic scholars do permit these practices, but with some modifications (for example replacing interest-based elements with Mudaraba principles) to meet the terms of Shari’ah principles.

To conclude, with the foreseeable future of globalisation, Muslims should take advantage of the potential benefits arising from the involvement in capital markets; this is to prevent the Muslims from being left behind to the non-Muslims. However, it should be in the mind of the Muslim investors that whatever actions or activities they partake in the capital market, they must be in accordance with the guidelines and rules stated under the Shari’ah principles.