Purport: Due to chronic financial crises experienced during last several
decenniums perpetually and a failure to forfend investors rights as a result,
the world is probing for an alternative form of stock market for quite some time
so that fascinates of all pertinent stakeholders can be safeguarded.
Concurrently, from the perspectives of devout Muslims, the current form of stock
market restricts a Muslim to make investments in the market due to unsatisfying
several provisions from the Islamic law, kenned as shariah. This study provides
the criteria under which conditions the Islamic shariah sanctions making
investments in the stock market. Hand in hand with that primary discussion, it
has been eluded briefly why the Islamic shariah principles offer a better
alternative against conventional practices of the stock market.
Design/methodology/approach: This is a descriptive study predicated on the
This study explores the fundamental Islamic principles of investment
in stock market by revisiting the norms laid down by shariah and current
ecumenical practices of Islamic stock market and indexes.
This study will work as a guideline for investors and market
ascendant entities to understand the pristine shariah rulings and the benchmark
rulings for investment or establishing full-fledged Islamic stock markets,
indexes, and mutual mazuma.
It is considered that the concept of stock market was first introduced in France
in the thirteenth century. The Islamic concept of mudrabah, which in some way
resembles with the modern stock market concept, on the other hand, can be dated
back to the age of Prophet Muhammad (PBUH) in the seventh century. Researchers
withal traced the inchoation of stocks to medieval Muslim traders.
Though Muslims are considered as the pioneer of profit and loss sharing
investments in businesses through contractual acquiescents, which predate the
concept of stock markets, the current form of stock market restricts the devout
among them from seeking economic bounties from it due to unsatisfying several
provisions from the Islamic law or shariah.
As a consequence, in spite of
religious inspiritment for Muslims to seek economic opportunities, they cannot
engage wholeheartedly in the trading of conventional stock markets. Moreover,
stock markets that follow the Islamic principles are still in early stages of
development. most of the stock exchanges in Muslim countries are rudimentally
western-style markets which abide many practices that do not comply with Islamic
Due to inhibited fixate on the Islamic finance, there are
circumscribed literatures available on the roles and principles of Islamically
compliant stock markets. Moreover, only a handful of stock markets across the
globe -- such as Khartoum Stock Exchange (KSE) in Sudan, Kuala Lumpur Stock
Exchange (KLSE) in Malaysia and Tehran Stock Exchange (TSE) in Iran, for example
-- accommodate for the Islamic Laws of trading in the stock market.
The conventional stock markets under the capitalistic system failed to bulwark
the intrigues of mundane investors time and again due to reiterated stock market
crashes across the globe, resulting chronic financial crises and economic
depressions. The conventional theory of Efficient Market Hypothesis (EMH)
denotes that no one can get anomalous profits from the market by utilizing any
type of historical, private or public information, but many studies have shown
that the market efficiency theory does not hold for many markets. Ergo,
investors and market regulatory bodies are probing for an alternative form of
capital market where investors rights and intrigues will be best forfended.
As the world has been able to visually examine the advantages and benefits of
the Islamic principles, value predicated Islamic banking system in particular,
at the time of recent financial crisis of 2008, the same principles and value
predicated system now can be suggested as a good alternative of the conventional
capital market system.
Predicated on inhibited experiences, this study
endeavors to document the guidelines under which conditions the Islamic shariah
sanction devout Muslims in trading in the stock market. Non-Muslims can withal
capitalize on this value-predicated investment and trading guidelines in their
favour. This study will be salutary for the regulatory ascendant entities,
investors, academicians, and researchers to establish Islamic value-predicated
stock markets and to conduct shariah-compliant halal businesses.
Conditions For Shariah permissibility of shares
The scopes of the Islamic law permeates all areas of the life of a human being,
which includes economics, finance, law, politics, regime and its integral
component parts, and convivial, ethical and religious aspects including values
and gregarious equity. Since Islam dictates every single aspect of public and
private intrigues for a believer, the guidelines about stock markets have
already been in place in principle by the shariah. Like other areas of the
shariah, it is the task of qualified jurists to extrapolate these principles,
derive germane rulings predicated on them, and apply them to market categorical
Al-Kasani (1983) and Zaman (1986) pointed out that the jurists have concurred
upon the partnership business and mudarabah contracts which were widely
practiced during the pre- Islamic era and withal by many companions of the
Prophet Muhammed (S). Al-khaiyyat (1989) further accentuated the issue and
mentioned that there is no proscription in the shariah in composing the stock
company or a partnership company or selling that share to anybody.
Al-Khaiyyat (1989), Fahd (2007) and Osmani & Abdullah (2009), stock markets are
impeccably licit in the shariah and there is no preclusion in Islam for the
establishment of capital markets. Recently, Khatkhatay & Nisar (2007) again
pointed out that investment in stock markets which conveniently opened the
main investment avenue to mundane Muslims is proximate to Islamic profit and
loss sharing paradigm.
Albeit making investments in the stock market is sanctioned in Islam in
principle, the shariah sets out certain rules and regulations for it which
differentiates an Islamically compliant stock market from a conventional stock
market. These guidelines are summarized below.
Characteristics of the Company
Share or stock designates ownership, and a shareholder or a stockholder betokens
an owner of the company. The long term investors as well as the sponsors or
progenitors are the long term shareholders who are mostly responsible for the
characteristics of the company through influencing the operations, nature of the
business and strategic decisions of the company.
However, the short term
investors, who are not investor in nature but frequently trade in the secondary
market to gain short term price change, have very little influence on the
operations, nature of the business and strategic decisions of the company.
Consequently, the long term investors are plenarily responsible for the
company's overall shariah provisions while the short term investors only need to
optically canvass the following characteristics of the company to eschew any
breach of the shariah principles.
Nature of the Business of the Company
Shariah provides few guidelines about the nature of the company which focuses
mostly on the religious value and gregarious wellbeing. At the commencement
point, the main business of the company must be accepted (halal) according to
Islamic principles. There are some companies which are involved in consummately
unacceptable (haram) activities, such as the company's manufacturing, selling or
offering of liquors, haram meat like pork, or involved in immoral accommodations
like wagering, discos, prostitution, night club, pornography, pubs etc. Shariah
does not sanction any Muslims to invest into these companies or the companies
where the core income is predicated on these activities.
Secondly, Islam rigorously enjoins any kind of riba (usury and interest). The
divine ascendancy (Allah) mentioned that trade is sanctioned, but riba is
verboten. Along with this enjoinment, the final prophet Muhammad (PBUH)
imprecated the practice of receiving and giving interest.
According to Islamic principles, it is not permissible to acquire the stocks of
the companies which are directly or indirectly attributed to riba or interest.
Companies that provide financial accommodations on interest, such as interest
predicated banks, indemnification companies, finance and leasing companies, etc.
additionally fall under this category of proscription.
In authenticity, the world is so intricate and interlinked that in many cases,
for local or international businesses, it is not possible to evade the
transaction from any interest predicated banking or any marginally involution
with interest. Further, in case of mixed kind of businesses, where multisectoral
companies are involved in both halal and haram activities, the Islamic jurists
from four major school of Islamic cerebrations - Hanafi, Maliki, Shafi and
Hanbali - concurred on the permissibility of investing in such companies under
concrete conditions (Khatkhatay & Nisar, 2007; Jamal et al., 2010).
According to Equity Mufti Muhammad Taqi Usmani, if the main business is halal,
but the company borrows mazuma on interest or places its mazuma into
interest-bearing accounts, shareholders should raise their voice against this
practice in the annual general meeting of the company (Usmani, 2010). When
Muslim shareholders receive dividend, they must ascertain the proportion of
dividend emanating from interest-bearing activities and give them to charity.
additionally mentioned that shariah philomaths have sanctioned to invest in
stocks of companies whose income from interest-cognate activities is less than
5% of the company's total income. Butt (2014) elaborates that the income of the
company from non-shariah compliant investment, which includes interest, should
not exceed 5% of its gross revenue.
The OIC (Organisation of Islamic Cooperation) Fiqh Academy, which includes fiqh
Philomaths from 53 majority Muslim countries across the world, made several
resolutions and recommendations for purchasing stocks (Ahmad, Ripain, & Noor,
2014), such as:
- Stocks of companies whose products are not sanctioned in shariah are
precluded to own, purchase, sell etc. Examples: interest-predicated banks and
indemnification companies, regalement business, etc.
- Stocks of companies that abide by the rules of shariah, such as Islamic
banks and Islamic indemnification companies are permissible.
- Stocks of companies whose products are permissible but the company
indulges in non-sanctioned transactions:
Such as getting interest predicated
financing, depositing in banks for interest, making contracts that include
proscribed conditions, e.g., selling gold and/or silver and/or currencies in
other than spot, or giving donations or selling arms to aggressors and
companies that engender permissible products but withal engender non permissible
products as a minor line of engenderment are not permissible in principle.
The Financial Accommodations Ascendancy of Indonesia (Kasi & Muhammad, 2016)
categorizes stocks as shariah compliant if the issuer company declares that its
business activities as well as its business management are conducted predicated
on the shariah principles and it is not involved in any of the following
- Trading with non-deliverance of goods or accommodation
- Trading with counterfeit offering/demand
- Conventional banks
- Conventional leasing companies
- Trading of peril that contain skepticality (gharar) and/or wagering (maisir),
e.g conventional indemnification
- Producing, distributing, trading and/or providing products or
accommodations that are verboten because of its contents; products or
accommodations that are verboten not because of its contents but because they are verbally expressed
verboten by the National shariah Board- MUI; and/or products or accommodations
that can degrade one's morals and are purposeless
- Doing transactions that contain bribe substance
According to Shariah Advisory Council (SAC) of the Securities Commission
Malaysia, mixed types of companies are sanctioned by shariah on the following
- The core activities of companies must be halal and the haram elements must
be minute compared to core activities;
- Public perception or image of the companies must be good; and
- The core activities of the companies should have paramount benefit to
the Muslim ummah (nation) and the country, and the haram elements - including umum
balwa (mundane plight and arduous to evade), urf (customs and rights of the
non-Muslim community) - which are accepted by Islam must be minutely minuscular.
In a broader perspective, aforetime in 2007, SAC of Securities Commission
Malaysia (2007) set several benchmarks to determine a tolerable level of
permissible and non- permissible activities such as:
- The five-percent (5%) benchmark:
This benchmark is applied to quantify the
caliber of mixed contributions from the activities that are limpidly enjoined
such as interest- predicated companies (like conventional banks, insurances,
financing and leasing companies etc.), wagering, liquor, pork, pornography, etc.
- The ten-percent (10%) benchmark:
This benchmark is applied to quantify the
caliber of mixed contributions from the activities that involve the element of umum balwa (proscribed elements affecting most people and arduous to eschew).
For example, interest income from fine-tuned deposit in conventional banks,
revenue engendered from tobacco-cognate activities as a minute part of an
overall shariah-compliant business.
- The twenty-percent (20%) benchmark:
This benchmark is applied to assess the
caliber of contribution from mixed rental payment from shariah non-compliant
activities, such as rental payment from the premise that involved in wagering,
sale of liquor etc.
- The twenty-five percent (25%) benchmark:
This benchmark is applied to assess
the caliber of mixed contribution from the activities that are generally
permissible according to shariah and have an element of maslahah (public
interest) to the public, but there are other elements that may affect the
shariah status of these activities. For example, hotel and resort operations,
share trading, stock brokerage houses, aeroplane companies etc., as these
activities may involve other germane activities that are deemed non-permissible
by the shariah.
Furthermore, the SAC of Securities Commission Malaysia (2012) revised its
benchmark criteria in 2012 and abbreviated the business activity benchmarks from
four benchmarks to only two benchmarks:
Nature of the Assets of the Company
- The five percent (5%) benchmark:
The contributions from these activities to
the group turnover and profit afore taxation should not exceed 5%
conventional banking, conventional indemnification, wagering, liquor and
liquor-cognate activities, pork and pork- cognate activities, non-halal pabulum
and beverages, shariah non-compliant regalement, interest income from
conventional accounts and instruments including dividends from investment in
shariah non-compliant instruments and interest income awarded arising from a
judgment by a court or arbitrator, tobacco and tobacco-cognate activities, and
other activities deemed non-compliant according to Shariah.
- The twenty percent (20%) benchmark:
The contributions from these activities
to the group turnover and profit afore taxation should not exceed 20%: hotel and
resort operations, share trading, stock broking business, rental received from shariah non- compliant activities, and other activities deemed non-compliant
according to shariah.
Shariah additionally provides some guidelines on the nature of the assets of the
company fixating on safeguarding the investor's intrigues and rights. First of
all, it does not sanction to invest in a company which has got only liquid
assets. If the company does not have any non-liquid asset, it would only be
permissible to trade at the par-value of the portions, because in this case the
portions represent homogeneous to cash mazuma.
Thus, trading above or below the
par-value would be considered as riba under Islamic principles (Usmani, 2010).
In authenticity, virtually all of the companies have both liquid and non-liquid
assets. In that case, the jurists have divergent views towards the ratio of
liquid assets to total assets. The Shafi and Hanbali schools of cerebrated have
set this minimum at 51%, while philomaths from Hanafi school of mentally
conceived have opined that the ratio must not be more than 33% (Jakhura, 2010).
Meezan Islamic Fund Criteria in Pakistan has set out the ratio of net illiquid
assets of the investee company as a percentage of the total asset should be up
to 10% (Khatkhatay & Nisar, 2007), whereas the S&P Islamic Index sanctions this
ratio up to 49%, FTSE Islamic Index sanctions up to 45%, and the Dow Jones
Islamic Market Index (DJIMI) sanctions up to 33%.
Moreover, Hanafi philomaths withal integrated two obligatory conditions.
Firstly, the non- liquid part of the amalgamation should not be in an ignorable
quantity. Secondly, the price of the amalgamation of both liquid and non-liquid
assets should be more than the price of the liquid amount contained therein.
Usmani (2010) provided a good theoretical example. A quota for $75 cash and some
fine-tuned assets holding company's price must be above $75.
If the price is set
at $70, it is considered as riba due to the lesser price than liquid assets. If
the price is set at $75, it is withal not permissible due to insignificance or
zero value for fine-tuned assets. As such, any value above $75 is valid due to
having a value for the fine-tuned assets. In the genuine world, it is very
arduous to imagine a situation where a price of the quota goes lower than its
Besides them, because of the expeditious spread of the cyber world since the
tardy 1990s, an incipient form of business has emerged where many companies have
been offering high-value accommodations and software-predicated solutions
without the desideratum of possessing any consequential physical inventory and
Albeit these companies are not in the business of manufacturing,
trading, retailing or accommodation in the conventional sense, they impact the
lives of billions of people all over the world. In lieu of acquiring physical
assets, these cognizance-predicated companies rely mostly on research,
innovation and patents. Albeit applying the conventional shariah practices
cognate to the ratio of liquid and illiquid assets is not practical for these
companies, the accommodations they provide are genuine, valuable and in many
cases obligatory. The emergence of this innovative form of business necessitates
conducting fresh research on this issue and promulgating the indispensable
resolutions from reverable fiqh councils.
Debt to Equity ratio
Shariah principles do not sanction interest bearing debt. However, predicated on
Islamic principles, shariah philomaths have sanctioned investment into a company
if its debt-financing is not more than 33% (Butt, 2014). The Dow Jones Islamic
Market Index and FTSE Islamic Index omit the companies in which debt to asset
ratio is more preponderant than or identically tantamount to 33%. Shariah
Advisory Council (SAC) of Securities & Exchange Commission in Malaysia
additionally follows this 33% standard. Meezan Islamic Fund Criteria in
Pakistan, on the other hand, sanctions up to 45% debt to asset ratio (Khatkhatay
& Nisar, 2007).
Characteristics of the Investor
Nature of the Ownership
Mundanely, stocks can be divided into two categories, namely: mundane stock and
preferred stock. Prevalent stock holders have voting rights and are considered
as the authentic owners of the company. They only have a residual claim
(whatever is left) on income and asset in the case of company's liquidation. On
the other hand, preferred shareholders do not have suffrage, and they are not
considered as genuine partners of the company. Preferred stock has a priority
claim over prevalent shareholders to a company's assets and earnings and must be
paid afore mundane stockholders. Dividends of preferred stocks are generally
more preponderant than those of prevalent stocks and are paid at customary
intervals. Since preferred shareholders do not have suffrage, and they are not
considered as authentic partners of the company, ergo, the extra mazuma they get
is like riba as they take it without sharing the jeopardy of profit and loss (Zaky,
Shariah sanctions only mundane stocks to be traded. There seems to be a
consensus of opinion among contemporary jurists on the permissibility of
exchanging mundane stocks through buying and selling transactions (Ahmad, Ripain,
& Noor, 2014). Selling a mundane share is like selling a portion of the quota of
the company; and it is considered as an individual's property, where the owner
has the right to sell or lend as long as it does not cause harm to other
shareholders (Osmani & Abdullah, 2009). Islamic Fiqh Academy declared that
investing in mundane shares is permissible if the main business of the company
is in compliance with shariah ruling (Ahmad, Ripain, & Noor, 2014).
Nature of the Intention
In stock markets, notional theorization subsists by nature and one might argue
that notional theorization resembles with wagering and consequently investment
in shares is not permissible by shariah. The argument here is that in stock
market, the buying or selling is done with the intention of making a profit
anticipating that price will transmute and gain will emanate from natural or
artificial price differences, speculators are ergo believed to deport with
unorthodox patterns of the markets within the desultory walks of stock price
forms of kineticism through the adoption of different "gambling" positions (Tag
el-Din & Hassan, 2007).
In shariah, qimar or wagering is stringently enjoined. There are two types of
wagering one way is just endeavoring to invest with the concept of being
fortuitous predicated on exorbitant jeopardy, just like spending mazuma in the
general case of wagering (Chapra, 1985), and another way is endeavoring to get
extra or anomalous profit through pulling up the price by any type of
manipulation such as composing a syndicate, spreading rumours, etc.
additionally covers unwonted, illogical, manipulated and unethical notional
theorization in the stock market which refers to trading in stock market
pristinely for short-term gains, resulting skepticality in the market and sure
losses or longer term situating of the portion for others.
The issue of notional theorization has been addressed by shariah philomaths and
they have provided their views on the issue. El-Ashkar (1995) pointed out that
investors in stock market buy securities on the hope that their prices will go
up in the future and they will be able to realize capital gains. Even those who
do not sell when prices go up, they do it on the hope that the prices will move
up even further. If they had kenned that prices would fall they would have
This is comportment quite legitimate. The objective of
these investors is to maximize their holdings even if not to instantly realize
capital gains. The distinction between speculators and other investors is that
while the former buy and sell in a very short time, the latter take longer to do
so. He additionally concluded that an Islamically compliant stock market will
not be thoroughly notional theorization-free, because a plausible degree of
notional theorization would be required, and indeed needed, if the market is to
be active and operative.
The Shariah Advisory Council (SAC) at its tenth meeting on 16-17 October 1997,
and at its eleventh meeting on 26 November 1997, on discussing the issue of
crude palm oil futures, resolved that notional theorization is permissible under
Islamic jurisprudence. Several arguments have been used to fortify the
permissibility of the notional theorization. According to SAC, notional
theorization and wagering appear to be homogeneous in practice.
As such, we do auricularly discern, for example, the exhortation not to treat the portion
market as a casino. This perception arises because speculators enter the market
depending solely on fortuity, akin to wagering. But the portion market is not a
place for wagering. It is a place that sanctions shareholders to dispose
ownership of shares to other investors in order to gain liquidity. Whether it is
wagering or not depends on the conduct of the investors who enter and leave the
market, and their motives.
Consequently, it can be concluded that under the shariah provision, the baseline
of notional theorization is founded on the intention or comportment of the
investors. The decisions must not be predicated on dubiousness and engendering
exorbitant jeopardy, but predicated on the fundamental analysis and intention to
get mundane profit from the market.
Characteristics of the Transaction
Nature of the Transaction
The pattern of transaction and its form differs among markets as well as among
Islamic jurists. There are several trading practices available in the stock
market, such as margin trading, derivatives- options and futures, short-selling,
etc. The licitness of these issues vary from market to market, conventional laws
and Islamic philomaths. Many markets preclude them because of their involution
in market manipulation and notional theorizations. Islamic philomaths proscribe
them because of their involution in interest and notional theorizations.
According to Osmani and Abdullah (2009), many Islamic jurists disaccord on the
validity of forwards, future and options as the sold commodity and payment of
the price are made in a future date resulting in the elements of gharar (skepticality)
and wagering. The shariah precludes gharar (selling something that is not owned
or that cannot be described in precise detail in terms of type, size, and
amount) (Hassan & Girad, 2010).
Al-Barwari (2002) (cited by Osmani & Abdullah, 2009) pointed out that the
council of the Islamic Fiqh Academy of Mecca decided that forward contracts with
all of its categories which are prevalent in the stock market are invalid due to
selling things that a person does not own. Similarly, the short-selling
contravenes the shariah principle for the same reason. Chapra (1985) vigorously
opposed the esse of short-selling in an Islamic market, arguing that such sales
are notionally theoretical involving riba and gharar in the whole transaction
and fails to perform any utilizable economic function. Naughton & Naughton
(2000) optically canvassed that by precluding short sales, masalahah (public
interest) is best accommodated.
However, a handful of Islamic jurists have sanctioned this type of contracts
predicated on a reported tradition of prophet Muhammad (PBUH) where he himself
got involved in a forward contract, as prophet Muhammad (PBUH) purchased a thin
impotent camel from Jabir with a price of one gold coin, which he paid later and
Jabir withal handed over the camel at a later date.
The Shariah Advisory Council
(SAC) of the Securities Commission Malaysia legalized this by regulated
short-selling (RSS) with the inclusion of securities borrowing and lending (SBL)
principles in Malaysia. According to them, under RSS, fulfillment of
distribution, settlement of contracts and payment of financial obligations are
always ensured, monitored and regulated, which minimizes the elements of gharar,
resulting in short-selling to be shariah-compliant.
Nevertheless, Dusuki &
Abozaid (2008) analyzed this permissibility further and argued that SAC should
reconsider its position as the issue of benefiting from loan, which refers to
riba, is still undefended. It is obligatory for Muslim to seek halal
(legitimate) earnings. Osmani & Abdullah (2009). on the other hand, sanctioned
these type of contacts under the condition that forward, futures and options are
only valid when both parties accede on the stipulated duration and price, with
no skepticality in the transaction.
Nature of the Zakat (compulsory tax) Provision
There is compulsory gain tax in many of the conventional stock markets. In
Islam, under shariah principles, there is no compulsory gain tax but there is
annual tax, called zakat, on culled assets if they transcend a certain level.
The zakat (compulsory tax) on stocks is obligatory upon the owners of the
quotas. The zakat may be paid by the company on behalf of the Muslim
shareholders or by the shareholders themselves. When zakat is paid at the
corporate level, the company is supposed to receive corporate tax benefits for
calculating low return alongside with providing charity or CSR (corporate
The company pays zakat if that is verbalized in the
company's constitution, or by law, or by management decision, or
predicated on shareholder's sanctions to pay on their behalf. If zakat
is not paid by the company, Muslim shareholders needs to pay it individually,
which will cause a lower rate of return for the investors. Moreover, if a Muslim
investor adheres to all shariah principles for investing in the stock market but
fails to pay the zakat due on these quotas, he is considered morally maleficent
in Islam. The entire exercise of following shariah principles meticulously
becomes a paradox if the investors ignore the payment of zakat.
There are two ways to calculate zakat at individual level, depending on the
nature of the investors. If the shareholder is a short term investor, , who has
the intention for price gain and is yare to sell the quota anytime when price
increases, then zakat will be calculated on the full market value of the quota
every year. If the shareholder is a long term investor, who has no intention to
take any short price gain but invests for dividend gain, then zakat will be
calculated only on the dividend amount every year, and onetime zakat on the full
selling price at the time of selling the portion (Bradford, 2015). Moreover, the
calculation of zakat for long term investors withal depends on the nature of the
company, such as:
- For accommodation predicated companies that do not engage in any kind of
trade, such as hotels, conveyance companies, etc., no zakat is due on assets but
on the mazuma or account receivable that consummated one full lunar year and the
profits of these quotas, because the value of these portions is predicated on
equipment, implements, buildings, furnishings and so on, which are exempted from
the calculation of zakat;
- For companies which engage only in trade, such as distributors,
importers, exporters, international traders, etc., and for the companies
which engage both in manufacturing and trade, such as petroleum companies,
textile companies, metal companies, chemical companies, etc. that extract or
buy raw materials, and trade them with some changes, zakat must be calculated on the mazuma or account
receivable that consummated one full lunar year, the inventory (for selling
purport) of these companies, and the profit of the portion; and
- For agriculture and livestock companies, zakat needs to be calculated on the
crops, fruits and livestock beyond a certain level of engenderments, such as 10%
if the crops are irrigated naturally and 5% if they are irrigated artificially
when the quotas reach a certain level.
The annual zakat rate is 2.5% generally for the lunar calendar year (Arabic/
Hijri calendar) or 2.58% for solar calendar year (any mundane calendar such as
Gregorian calendar). The zakat is obligatory only in the case of when total
share value of the shareholder is equipollent to or above the price of 595 grams
of silver or 85 grams of gold, and according to many jurists it should be in
perpetual possession for a period of one lunar year.
The Hanafi jurists do not
consider perpetual possession as a condition, rather if the stipulated amount is
present both in the commencement date of the calculation cycle and on the same
date the following year then zakat needs to be paid on it regardless of what
transpired in between these dates. The calculated value of the zakat can be paid
from personal cash fund if not possible to pay by selling the quota at the
terminus of the year.
Another option is to keep the zakat due till the time of determinately selling
the quota. In this method, zakat is calculated on market value for each year and
all due amounts should be disbursed together from the final selling price. A
hypothetical example for the trading case: holding a quota of which the current
market price is $100. Thus, (year 1) the due zakat is: 2.5% of $100 = $2.5. The
following year (year 2), suppose the current market price is $200.
As such, (year 2) the due zakat is: 2.5% of $200 = $5. Now, total due for two
years is $7.5. If the portion is sold at the terminus of the 2nd year, total
zakat of $7.5 will be paid from the selling magnitude. If any dividend is
received within the period, zakat additionally needs to be calculated on that
The zakat amount can be distributed by the shareholders individually or by the
regime to eight categories of people who are eligible to receive zakat poor,
needy, people employed to amass or administer the zakat mazuma, non-Muslims or
Muslim who need to be magnetized regarding Islam. 17 In integration, one can
present the mazuma to free slaves and captives, pay off the debt on behalf of an
unable person, and to those who are fighting for the sake of Allah.
The conventional efficient market theory fixates on the rights of the investors
and works as safeguard from unwonted financial crisis, even from any
extraordinary return by any group, which is not yet ascertained since inception
under the current capitalistic form of capital market system. The outcomes of
chronic financial crisis suggested that market should be run by a system which
will ascertain efficiency, equity, fairness, accountability, fair distribution
of benefits among investors, good governance, and ethical characteristics of the
investors. The western given format of the capital market including its
efficiency theory failed to ascertain the practical safeguard for diminutive and
less efficient investors.
On the other hand, at the time of recent financial crisis, the world visually
examined the preponderation of value predicated principles of Islamic shariah
system for the banking sector. Consequently, to bulwark the investors' rights,
stock market under the same value predicated system can be suggested as a good
alternative of the conventional stock market system. This article fixates on
these rules and regulations of Islamic shariah for the stock market that are
ignored by the conventional market efficiency theory.
While exploring the
fundamental Islamic principles of investment in stock market, the paper revisits
the norms laid down by shariah as well as current practices of Islamic stock
market and indexes around the world. Consequently, it will avail the investors
to setup their own standard of benchmark for investment in stock market, and the
market ascendant entities will get a guideline to establish Islamic index,
mutual mazuma, and a full-fledged Islamic stock market.
Quran verses used to interpret Shariah law on stock markets:
And do not consume one another's wealth unjustly or send it [in bribery] to the
rulers in order that [they might aid] you [to] consume a portion of the wealth
of the people in sin, while you know [it is unlawful]. (2:188)
Hadiths used for interpreting this research work:
- And whatever you give for interest to increase within the wealth of people
will not increase with Allah. But
what you give in Zakat, desiring the countenance of Allah - those are the
multipliers.� [Al Quran 30:39]
- Those who consume interest cannot stand [on the Day of Resurrection] except
as one stands who is being beaten by Satan into insanity. That is because they
say, �Trade is [just] like interest.' But Allah has permitted trade and has
forbidden interest. So whoever has received an admonition from his Lord and
desists may have what is past, and his affair rests with Allah. But whoever
returns to [dealing in interest or usury] - those are the companions of the
Fire; they will abide eternally therein.
Allah destroys interest and gives
increase for charities. And Allah does not like every sinning disbeliever.
Indeed, those who believe and do righteous deeds and establish prayer and give Zakat will have their reward with their Lord, and there will be no fear
concerning them, nor will they grieve. O you who have believed, fear Allah and
give up what remains [due to you] of interest, if you should be believers.
if you do not, then be informed of a war [against you] from Allah and His
Messenger. But if you repent, you may have your principal - [thus] you do no
wrong, nor are you wronged. And if someone is in hardship, then [let there be]
postponement until [a time of] ease. But if you give [from your right as]
charity, then it is better for you, if you only knew. And fear a Day when you
will be returned to Allah. Then every soul will be compensated for what it
earned, and they will not be treated unjustly.� [Al Quran 2:275- 281]
- O you who have believed, indeed, intoxicants, gambling, [sacrificing on]
stone alters [to other than Allah], and divining arrows are but defilement from
the work of Satan, so avoid it that you may be successful.� [Al Quran 5:90]
- Zakat expenditures are only for the poor and for the needy and for those
employed to collect [Zakat] and for bringing hearts together [for Islam] and for
freeing captives [or slaves] and for those in debt and for the cause of Allah
and for the [stranded] traveler - an obligation [imposed] by Allah. And Allah is
Knowing and Wise.� [Al Quran 9:60]
Narrated Tarif Abi Tamima: I saw Safwan and Jundab and Safwan's companions when
Jundab was advising. They said, Did you hear something from Allah's Apostle?
Jundab said, I heard him saying, 'Whoever does a good deed in order to show off,
Allah will expose his intentions on the Day of Resurrection (before the people),
and whoever puts the people into difficulties, Allah will put him into
difficulties on the Day of Resurrection.'
The people said (to Jundab), Advise
us. He said, The first thing of the human body to purify is the `Abdomen, so he
who can eat nothing but good food (Halal and earned lawfully) should do so, and
he who does as much as he can that nothing intervene between him and Paradise by
not shedding even a handful of blood, (i.e. murdering) should do so.
[Sahih Al - Bukhari : 7152].
Narrated Abu Juhaifa: The Prophet cursed the lady who practices tattooing and
the one who gets herself tattooed, and one who eats (takes) Riba (usury) and the
one who gives it. And he prohibited taking the price of a dog, and the money
earned by prostitution, and cursed the makers of pictures. [Sahih al-Bukhari,
Book 7, Volume 63 (Divorce), Hadith 259].
Ibn Abbas said: Allah's Apostle said:
Do not go to meet the caravans on the
way (for buying their goods without letting them know the market price); a town
dweller should not sell the goods of a desert dweller on behalf of the latter.�
(The narrator) asked Ibn Abbas, What does he mean by not selling the goods of
a desert dweller by a town dweller?� He said:
He should not become his
�. [Sahih al-Bukhari, Book 3, Volume 34 (Sales and Trade), Hadith 367].
Umar Bin al-Khattab narrated: I heard Allah's Apostle saying, The
reward of deeds depends upon the intentions and every person will get the
reward according to what he has intended.� [Sahih al-Bukhari, Book 1, Volume 1
(Revelation), Hadith 1].
Abu Huraira (Allah be pleased with him) reported that Allah's Messenger (may
peace be upon him) forbade transaction determined by throwing stones, and
the type which involves some uncertainty. [Sahih Muslim, Book 10 (The Book of
Transactions), Hadith 3614].
Narrated Hakim ibn Hizam: Hakim asked (the Prophet): Apostle of Allah, a man
comes to me and wants me to sell him something which is not in my possession.
Should I buy it for him from the market? He replied: Do not sell what you do not
possess. [Sunan Abu Dawud, Book 23 (The Book of Wages), Hadith 3496].
Jabir b. 'Abdullah (Allah be pleased with them) reported:
I went on an
expedition with Allah's Messenger (may peace be upon him). He overtook me and I
was on a water-carrying camel who had grown tired and did not walk (trot). He
(the Holy Prophet) said to me:
What is the matter with your camel? I said: It is
sick. He (the Holy Prophet) stepped behind and drove it and prayed for it, and
then it always moved ahead of other camels. He (then) said: How do you find your
camel? I said: It is, by the grace of your prayer, all right.
sell this (camel) to me? I felt shy (to say him," No" ) as we had no other camel
for carrying water, but (later on) I said: Yes, and to I sold it to him on the
condition that (I would be permitted) to ride it until I reached Madina. I said
to him: Allah's Messenger, I am newly married, so I asked his permission (to go
ahead of the caravan).
He permitted me, and I reached Medina well in advance of
other people, until I reached my destination. There my maternal uncle met me and
asked me about the camel, and I told him what I had done with regard to it. He
reproved me in this connection.
He (Jabir) said:
When I asked his permission (to
go ahead of the caravan) Allah's Messenger (may peace be upon him) inquired of
me whether I had married a virgin or a non-virgin. I said to him: I have married
Why did you not marry a virgin who would have played with
you and you would have played with her? I said to him: Allah's Messenger, my
father died (or he fell as a martyr), and I have small sisters to (look after),
so I did not like the idea that I should marry a woman who is like them and thus
be not able to teach them manners and look after them properly.
So I have
married a non-virgin so that she should be able to look after them and teach
them manners, When Allah's Messenger (may peace be upon him) came to Medina, I
went to him in the morning with the camel. He paid me its price and returned
that (the camel) to me. [Sahih Muslim, Book 10 (The Book of Transactions),
Award Winning Article Is Written By: Mr.C Sancho Roy
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