fbpx
CURRENTLY ON AIR ⇒
  • Interviews, Current Affairs
    Mon, 8:05 am - 9:00 am
    [ - ]

feedback@radioislam.org.za

Radio Islam Logo


((( Listen Live )))))
Radio Islam Logo


Shariah based finance Conditions for Investment in Shares

Sep 17, 2007

By Mufti Taqi Usmani
——————–

Dealing in equity shares can be acceptable in Shariah subject to the following conditions:

1. The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, Haraam meat, or involved in gambling, night club activities, pornography etc.

2. If the main business of the companies is Halaal, like automobiles, textile, etc. but they deposit there surplus amounts in an interest-bearing account or borrow money on interest, 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.

3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par.

Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners “inter se.” All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as “purification.”

Purification is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted there from, reducing the net asset value per unit, he will get a lesser price compared to the first person.

On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.

The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as Mudaribs (Managing partner) for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits.

The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year.

However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers.

 

ADVERTISE HERE

Prime Spot!!!

Contact:
advertisingadmin@radioislam.co.za 

Related Articles

Commercial Morality

The quest for sustenance is regarded as "seeking the bounty of Allah", and is thus hued with a profoundly religious character. The Noble Qur'an states: "When the (Friday) prayer is complete, disperse through the land and seek the Bounty of Allah Ta'ala (through trade...

read more

A Muslim Businessman’s Oath

I will, Insha-Allah, behave Islamically towards: My Creator:* My intention for business will not be merely to enrich myself but to earn Halaal and spend in the right path* I will regard it as a compulsory duty to learn all the Islamic rules and laws regarding...

read more

HOW HALAAL ARE OUR EARNINGS???

 2012-01-26Ever since the expose of the MJC its seems to be a hot topic of discussion in most social circles.Whilst having a conversation with his ustaadh, my husband brought up the topic of the “MJC Expose”The response of his ustaadh was truly...

read more

IJAARAH: Hiring in Islam

WORDS TO REMEMBER:Lessor: The one who lets out property under a lease. This is the owner of the property generally referred to as the landlord.Lessee: The one who holds a lease. This is the person who hires or rents a property, generally referred to as the tenant....

read more

Interest is Haraam, prohibited

 by Mufti Muhammad Shafi'i Rahmatullahi 'Alaihi Muslims may at least regard a Harâm matter to be Harâm and extremely detrimental in this world and the Âkhirah and thereby correct their knowledge. It is of great benefit for a sick...

read more

Subscribe to our Newsletter

0 Comments

Submit a Comment

Your email address will not be published. Required fields are marked *