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Prof. Dr.Masum Billah |
Shari’ah Regulations of Investment
By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542
INTRODUCTION
Investment, which is in line with the Islamic law or Shari’ah principles, has been one of many concerns that a Muslim faced today.
This write up is a modest contributory note that sets out the most important Shari’ah rulings to be fulfilled when one would like to invest, or as a guideline for making an Islamic investment.
Investment and production in Islam take place within the framework of the following concepts and principles:
- The Divine concept is that Allah has created Man to settle on earth blessed, and provided him with considerable natural resources in order to meet his needs and achieve his increase welfare.
- Inevitability of investing funds so that they would not be consumed in paying the legitimately due Zakat.
- Prohibiting the accumulation and blocking of funds from circulation through motivating the hidden capacities of individuals.
- Eliminating monopoly which creates more differences among the economic levels of the one society
- All products whether they be commodities or services must lie within the scope of Halal (legitimacy) or by granting priority to the principle of the community needs and interest of both the individual and society.
WHY WE INVEST?
Savings refer to that part of income that is not spent on consumption. Investment is that part of expenditure that is made, not for consumption purposes, but on creation of new capital assets such as buildings, land, stocks, mutual funds, etc. Investments are made for obtaining a benefit further away in the future.
When money is kept idle, that is not invested, it looses its value or purchasing power overtime because of inflation. Studies have conclusively proven that un-invested cash has lost over 93% of its purchasing power over the last 200 years. The same studies have also proven that investing in stocks has proven to be more rewarding than investments in securities and bonds with a fixed rate of return.
We invest because of our own consciousness to have a safe future but it is also commanded by Allah s.w.t as evident in the Qur’an and Sunnah.
For future use, so we do not to have to borrow from others
“Allah blesses those who acquire wealth in good manner, then the wealth is spent accordingly and the remaining is saved for future use when hardship occurs.”
Narrated by Ibn Mas’ud (r), the Holy Prophet (saw) said:
“In the day of Judgement, the generation of Adam (a) will not be allowed to escape without being questioned on the following five basic responsibilities:
- How did one spend own life time;
- How did one spend own young life;
- How were the sources of one’s income;
- How did one spend own wealth;
- How much did one practises knowledge, which one acquired?”
“Verily, Allâh! With Him (Alone) is the knowledge of the Hour, He sends down the rain, and knows that which is in the wombs. No person knows what he will earn tomorrow, and no person knows in what land he will die. Verily, Allâh is All Knower, All Aware (of things)
Hadith on to avoid oneself of involving in debts:
“Oh Allah, I seek refuge in thee from sin and debt. He was asked why do you so often seek the protection of Allah (swt) from debt. He replied: One who is in debt tells lies and breaks promises.”
“I seek refuge in thee from unbelief and debt.” A man asked him, do you equate debt with unbelief? He replied: “Yes”
To abstain ourselves from being spendthrifts
“Verily, spendthrifts are brothers of the Shayatîn (devils), and the Shaitân (Devil Satan) is ever ungrateful to his Lord.
“And it is He Who produces gardens trellised and untrellised, and datepalms, and crops of different shape and taste (its fruits and its seeds) and olives, and pomegranates, similar (in kind) and different (in taste). Eat of their fruit when they ripen, but pay the due thereof (its Zakât, according to Allâh's Orders 1/10th or 1/20th) on the day of its harvest, and waste not by extravagance []. Verily, He likes not Al-Musrifûn (those who waste by extravagance)
Invest For the Benefits Of Others
From investment profit, we can help others by giving away charity and sadaqah. We also may pay zakat from the profits we have from investment, thus it would bring benefits to others.
“the most excellent of men is the believer who strives hard in the way of Allah with his person and property.”
“He who bring forth what is needed will be provided for and he who monopolizes is cursed.”
WHAT TO INVEST IN?
There are basically two categories of assets one can invest in, namely:
- Physical assets: real estate, gold coins
- Financial assets: stocks, mutual funds and unit trust
Financial assets are a more preferred choice because they are more liquid that physical assets. This means that they can be bought and sold with ease, cash can be realized anytime even on a short notice. Financial assets are more volatile, meaning that their values move up and down regularly. Financial assets offer two types of returns-cash income and capital gains.
WHY SHARI’AH COMPLIANCE?
- To ensure acceptance, validity and enforceability from Islamic law point of view
- The original rational for having an alternative Islamic system that meets the religious requirements of Muslims in line with their belief and faith
- The factor which distinguishes Islamic banking and finance from its conventional counterpart
- Fulfills the goal and objectives of Islamic financial system, i.e., to achieve justice and fairness in the distribution of resources
WHAT AMOUNTS TO SHARI’AH COMPLIANCE?
- In Islamic legal method, the main source of law is the Shari’ah or Islamic law as contained in the Al-Qur’an & Sunnah
- Underlying rule: all contracts are deemed permissible except when there is contravention of any established principles of Islamic law or Shari’ah
- Legal maxim (qa’idah fiqhiyyah):
-“the original rule in contracts is permissibility”
- The parameter: Avoidance of any contravention of the established principles and prohibitions in Islamic law
SHARI’AH RULINGS IN INVESTMENT CONTRACT
INVESTMENT SHOULD ONLY SUPPORT HALAL ACTIVITIES
The Shari’ah does not permit Muslims to invest in any business or activity that involves the production of items or the pursuit of activities the Shari’ah considers haram, or impermissible. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, selling or serving liquor, pork, involved in gambling, night club activities, pornography and etc.
Mufti Taqi Uthmani issued a Fatwa, which rules out that:
“If the main business of a company is not Halal (lawful) in terms of Shari’ah, it is not Halal (lawful) for one to purchase, hold, or sell its shares, because, it will entail the direct involvement of the shareholders in that Haram (prohibited) business”.
EVERY CONTRACTUAL PARTY SHOULD HONOUR CONTRACTUAL
PROMISES
“O you who believe! Fulfill (your) obligations. Lawful to you (for food) are all the beasts of cattle except that which will be announced to you (herein), game (also) being unlawful when you assume Ihrâm for Hajj or 'Umrah (pilgrimage). Verily, Allâh commands that which He wills.”
“Verily! Allâh commands that you should render back the trusts to those, to whom they are due; and that when you judge between men, you judge with justice. Verily, how excellent is the teaching, which He (Allâh) gives you! Truly, Allâh is Ever AllHearer, AllSeer.”
“And come not near to the orphan's property except to improve it, until he attains the age of full strength. And fulfil (every) covenant. Verily! the covenant, will be questioned about.”
“O you who believe! Eat not up your property among yourselves unjustly except it be a trade amongst you, by mutual consent. And do not kill yourselves (nor kill one another). Surely, Allâh is Most Merciful to you.”
“Woe to Al-Mutaffifin [those who give less in measure and weight (decrease the rights of others)],”
“Those who, when they have to receive by measure from men, demand full measure”
“And when they have to give by measure or weight to men, give less than due. ”
Intention and consent have become the two fundamental principles to any contractual relation. As evident in the Hadith:
“The Prophet (saw) said, “Validity of the acts depends on (doers) intentions.”
PRESERVE THE UNITY OF MIND AND SINCERITY IN INVESTMENT
CONTRACTS AND DEALINGS
The investment should be concluded in sincerity between the parties and no one should cause harm to one another.
“O you who believe! Why do you say that which you do not do?
Most hateful it is with Allâh that you say that which you do not do.
Profit & Loss Sharing
The basic and foremost characteristic in Islamic investing is, instead of a fixed rate of interest, it is based on profit & loss sharing. Islam encourages Muslims to invest their money and to become partners in business instead of becoming creditors. This would in turn encourage entrepreneurship.
Complete Segregation of Funds
The funds of the Islamic investment product and those investments in which Shari’ah provisions are not observed must be completely segregated. The funds of investors who are very diligent and anxious to earn lawful income should not be commingled with those of conventional investors who are not observant of the Shari’ah. Therefore, there should be separate accounts, books, and computer programs evidencing this complete segregation of funds.
The existence of Shari’ah supervisory board
There should be a Shari’ah supervisory board for any institutional Islamic investment body, and that Board should consist of trustworthy scholars who are highly qualified to issue fatwa (religious rulings) on financial transactions. In addition, they ought to have considerable experience with knowledge of modern dealings and transactions. The Board should be independent and free to give opinions on proposed contracts and transactions.
Management committed to Islamic financial concepts
The investment’s fund manager should be fully convinced of the Islamic investment concept and fully committed and dedicated to it. It should be anxious to implement and comply with the teachings governing it. Unless the entire management is committed and convinced, the business activities and the enterprise will not be foul free or will not escape irregularities and deviation. Regardless of how strict and stringent fatwa and contracts are, this will not ensure sound practices if there is no one sufficiently sincere and committed to implement the principles.
Compliance with the standards of the AAOIFI
The Accounting and Auditing Organization for Islamic Financial Institutions has issue and published a number of accounting and auditing standards that all Islamic financial institutions should comply and implement. The AAOIFI’s activities are considered a fundamental groundwork that underpins Islamic banking activities by keeping them away from individual, personal reasoning. The collective personal reasoning (ijtihad) of the AAOIFI is highly important in this vital aspect of Islamic economic life.
Therefore, Islamic investment should comply to these standards in order to avoid confusion, misunderstanding, and ambiguity, and to seek clarity and sound business activities.