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Share Trading

Answered as per Hanafi Fiqh by Albalagh.net

Share Trading

By Mufti Shafiq Jakhura and Mufti M.D. Mangera

Q. I want to work professionally in share brokerage house. In Bangladeshi share market, there are both halal & haram products. The latter include interest/ riba based banks, financial institutions & insurance companies.

A.A very common and lucrative form of business and investment in modern times is share trading. Joint-stock companies and share trading have become one of the most important financial instruments of modern-business. Many Muslims around the World have delved into this form of business and their numbers are increasing on a daily basis. Hence, it is incumbent upon Muslims dealing in share trading to understand the Shariah rulings with regard to share trading. The present article aims at highlighting the conditions and regulations governing share trading, from a Shariah perspective. It is the writers request to all Muslims to strive in adhering to the rules of Shariah in all aspects of their life, and in particular to strive towards ensuring that their income is from halal sources by carefully scrutinising the Shariah compliance of their income streams.

 Let us now discuss whether share trading is permissible and if so the conditions and regulations that govern such trading. Shariah Scholars have discussed and studied the issues related to share trading and have allowed such buying and selling of shares provided the following conditions are strictly adhered to.

  1. The main business of the company whose shares are to be traded in should be halal. If the main business of the company violates the laws of Shariah, then trading in such a company’s shares would not be permissible. Hence, trading in the shares of conventional banks, conventional insurance companies, companies manufacturing or selling alcohol, night clubs, pornographic magazines etc. are totally prohibited in the Shariah. Any income derived from trading in such shares whether such trading is for capital gain, or to share in the dividends of the company would be regarded as impermissible. This is the very first condition that should be adhered to whilst trading in shares. Muslims should make sure that the business of company whose shares they are buying and selling is Shariah compliant.
  2. The company whose shares’ are sought to be traded in should have some non-liquid assets as well. E.g. building, machinery, raw material etc. If the business does not have any non-liquid assets, it would only be permissible to trade in the shares of such a company at the par-value of the shares. This is because, in this case the shares represent money only and money cannot be traded in except at par. Trading above or below the par-value would not be allowed in such a situation and would amount to riba.

The ratio of non-liquid to liquid assets is an aspect in which there is a difference of opinion amongst the jurists. Some Shariah Scholars have given a ruling that the non-liquid assets of the company should be at least 51% of the company’s total portfolio. This is the view of the contemporary scholars from the Shafii and Hambali schools. Other scholars have opined that even if the non-liquid assets of the company are 33%, their shares may be negotiable. The third view is based on Hanafi jurisprudence. The principle of the Hanafi school is that whenever an asset is a combination of liquid and non-liquid assets it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions:

a)      The non-liquid part of the combination should not be in ignorable quantity. As such, it should be in a considerable proportion.

b)      The price of the combination should be more than the liquid amount contained therein. For example, if a share of USD 100.00 represents USD 75.00 in cash and USD 25.00 in fixed assets, the share could be sold or bought at any price above USD 75.00 as USD 75.00 would be in exchange of the liquid USD 75.00 component of the share and the remainder amount would be in exchange of the illiquid assets. Selling such a share at USD 75.00 or below is not permitted. If the share is sold below USD 75.00 it would amount to selling USD 75.00 for less than USD 75.00 which would be analogous to riba. Similarly selling, the share at USD 75.00 would also not be permitted, because if we presume that USD 75.00 of the price is against the liquid component of USD 75.00 owned by the share, no part of the price can be attributed to the fixed assets. Hence the share, in this instance, must be sold at a price higher that USD 75.00.

Based on this, the Shariah Supervisory boards of some Islamic Financial Institutions have ruled that only if the non-liquid assets of a company are not less than 10% (i.e. they are at least 10 %), their shares may be negotiable. Further, the total debt of the company should not exceed 45% of the total asset.

  1. If the main business of the company is halal, but the company has a certain stream of income that accrues from non-permissible sources, e.g. the company deposits their surplus funds in interest bearing accounts, or the company engages in other non-permissible activities as a side-line to the core business, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company. Contemporary Shariah Scholars have ruled that total income from haram sources should not exceed 5% of the total income. Further the total investments of the company in non-Shariah compliant activities should not be more than 33% of the total assets of the company.
  1. The forth condition is that if some of the income of the company is from interest bearing accounts, or other impermissible sources, the proportion of such income in the dividend paid to the shareholder must be given in charity and should not be retained by the shareholder.

Share trading is thus permissible subject to these conditions.

The aspect of possession in share trading

The aspect of possession in share trading is an important aspect from a Shariah perspective as the seller of shares may only sell the shares once he has taken possession thereof. The detail of the possession of shares and the Shariah ruling of the same is mentioned hereunder.

Day Trading

Day trading in spot transactions that are carried out at the stock exchanges generally follows the following pattern. As soon as a transaction takes place, its details are recorded on a data base at the stock exchange. However, the buyer in the transaction is only required to pay for the shares he has bought three to five days after the transaction depending on which exchange one is trading. Similarly, the seller is only required to deliver the shares three day after the transaction. The delivery takes place by the transfer of the share into the name of the buyer. Once the name is transferred in this manner the possession of the share has taken place by the buyer according to the definitions and practices of the stock exchanges. Hence the transfer generally takes place after this period.

The ruling with regards to the buyer of the shares selling these shares is that the buyer is not allowed to sell these shares until the shares are transferred to his name which generally takes three to five days (according to the present practices). Selling the shares before the transfer to his name is not allowed in the Shariah even though the risks and rewards related to the shares may have transferred to buyer of the shares once the transaction was recorded in the data base of the stock exchange at the initial point of the sale (as claimed by the authorities who work at the stock exchanges). This is because the sale of a share is actually the sale of an undivided share of the company it represents. Actual possession of this undivided share is also not possible.

Hence from a Shariah perspective it is imperative for possession of the share to take place by the buyer, to ensure that takhliya is found. The term takhliya refers to a method of taking possession whereby the buyer of a commodity is not given the commodity physically but he is able to take the commodity whenever he feels. This takhliya generally does not take place before the transfer of the share in the name of the buyer. Hence, Muslim share traders are urged to ensure that this condition is adhered to when buying and selling shares.

And Allah Ta’ala Knows Best


This answer was collected from Albalagh.net, which is an Islamic site with Q&A and articles authored by many world renowned scholars from the Muslim world. Many of Mufti Taqi Uthmani’s fatawa in English are found exclusively on this site.

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