By Islami Tijara,
This is second part of the 4 part series on the idea of Equity Market being best investment options for Muslims
Islam makes ‘Lawful Earning’ (Halal) mandatory, and in Islam, the spiritual and material aspects are one and the same. This implies that Islam emphasizes the need to make a living by means that are permissible under it.
After many decades of debate and discussions and upon understanding the need of Muslims to invest in equity market, Islamic scholars globally gave their consent to Muslim to invest in equity markets, but with certain strict conditions. As explained earlier that fundamentally investments in equity shares is Halal on the basis of Musharakah (partnership) on profit and loss sharing basis. But one cannot partner in the businesses that are not permitted in Islam (e.g. liquor, pork, banking, entertainment etc) moreover the conventional companies are prone to take interest based debt and earn interest. And these are the reasons for which the Muslim community kept themselves away from the equity market.
Shariah scholars have imposed investment restriction and conditions and only upon fulfilling these conditions Muslims can invest in equity markets the halal way.
The conditions laid down are as follows:
1. Restriction Based on the Type of Securities: Investment should only be done in Shariah compliant stocks as defined. Securities trading in derivatives and day trading in stocks are strictly not permitted. Short selling is completely prohibited. Securities should only be sold upon having its complete possession.
2. Restriction on Business Activity: No investment shall be made in stocks of the companies whose business activity is prohibited (Haram)
a. Conventional interest based banks and other financial institutions like banks, NBFC, Insurance companies, stock brokers etc.
b. Alcoholic beverages like wine and other liquor related products and services.
c. Pork and non- Halal food products
d. Entertainment includes film production companies, cinema, Cable TV, music etc
3. Restriction Based on Financial ratios: Apart from the above restriction on business activity, Islamic scholars from different part of the world have set certain financial criteria based on the need. In India Islamic Investment & Finance Board (IIFB) comprising of eminent scholars have approved the following financial criteria:
a. Interest bearing debt of the companies should not exceed 33 percent of its twelve months average market capitalization.
b. Cash plus interest bearing securities of the companies should not exceed 33 percent of its twelve months average market capitalization.
c. Trade receivable and other debtors of the companies to its twelve months average market capitalization should not exceed 33 percent.
d. Interest Income plus prohibited activity (impure) income of the companies to the company’s total income should not exceed 5 percent.
4. Shariah Screening Process: Shariah screening is conducted for all the listed equities as prescribed and mandated by Shariah scholars. This process is done every quarterly. Those stocks that successfully pass the Shariah screens are thus called Shariah compliant universe. This process is done under the supervisor and audit of Shariah committee of Aalims and Muftis.
5. Purification of Impure Income: The income thus derived from trading and investments in shares do have some portion of impure or prohibited income. This income can be in form of interest received by the companies or some prohibited activity carried on by the company that earns impure or tainted income needs to be cleansed or purged. This is a compulsory process. The impure income consequently cleansed should be given as charity.
First part of the series on Equity Market and Islamic Tijara— Equity Market – The Best investment option for Muslims
(Note- ‘Islami Tijara’ is India’s only Magazine, which covers Islamic Finance industry exhaustively. Please visit www.islamitijara.com for more details.)