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Ruling on Margin Financing

Answered as per Shafi'i Fiqh by Darul Iftaa Jordan
What is the ruling on lending a client an amount larger than that which he had deposited forbuying stocks at the Amman Stock Exchange; knowing that the financial intermediary (Company) charges a commission against each buy and sell activity undertaken by the client?

All perfect praise be to Allah The Lord of the Worlds and may His peace and blessings be upon our Prophet Mohammad and upon all his family and companions.

Margin financing is a method by which the financial intermediary pays a portion of the securities value in the account of margin financing where the securities, in that account, are the security deposit. Financial intermediaries and clients use two key methods of stock circulation: Margin Financing and Cash Dealing.

Margin financing requires that the financial intermediary (company) sells the stocks of the client to collect its debt and commission on that loan for each buy and sell activity and without obtaining the consent of the client and that is, of course, when the maintenance margin gets below the minimum allowed limit. Article(17) of the Securities Law/Jordan states:
A-In case the client fails to make up for the shortage mentioned in Article(16) of these regulations, the (company) shall sell a portion of the securities deposited in the margin financing account to raise the maintenance margin to the minimum allowed limit, and that is, of course, after the (company) collects its commission from the client against each buy and sell activity concerning the loan and the original amount deposited by the client himself; in either loss or profit.

In conclusion, from the perspective of Islamic Law(Sharia), margin financingis prohibited because it involves Riba(Usury/Interest). For the financial intermediary, the loan,itself, is a benefit, so it is included under the Sharia maxim, "Every debt that yields a benefit is Riba." And Allah knows best.

This answer was collected from the official government Iftaa Department of Jordan.

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