Islamic Classes‎ > ‎2012 Summer‎ > ‎

Fiqh of Financial Transactions

Fiqh of Financial Transactions: Stocks, Bonds, and Sukuk
2012 Summer Session (August 26 to October 21 2012)
Class taught by Shaikh Jamaal Zarabozo

Course Outline:
This quarter will concentrate on stocks, bonds and Islamic bonds (sukuk) and then move on to credit cards (time permitting).

Text:
Understanding Islamic Finance by Muhammad Ayub
Suggested Reading in Ayub:
Stocks pp. 199-204
Bonds/Sukuk pp. 389-412

Basic Outline of the Quarter: Stocks, Bonds and Sukuk
What are stocks and how do stocks work
The General Islamic ruling on stocks
The Islamic Indices
Bonds and a Fixed Returns on Investment?
Sukuk and Securitization
Credit Cards (time permitting)

2012-08-26 Class Notes

We have been covering a number of topics that are essential to Islamic finance, we started with basic principles such as contract theory in Islam, and some essential elements that the Islamic contracts should be free of such as riba, then we discussed mortgages and student loans. In this quarter we will discuss stocks and bonds.

The textbook does not discuss much about stocks, rather it spends more time discussing bonds and sukuk.

Shaikh is asking us pointed questions to get us thinking about this topic and how this class will help us answer these questions.

In sukuk you can get a fixed rate of return, does this sound Islamic? Think about it.

How many of you believe that given certain conditions such as dow jones islamic index, believe that there is ijma of scholars that stocks are halal?

So first part of the class we discuss what are stocks and are stocks acceptable in Islam? Is limited liability a concept acceptable in Islam.

We will then discuss different categories and types of stocks.

Then we will discuss primary share market (e.g. IPOs) and secondary markets (stock markets)? Then we will discuss number of Islamic indices and whether they are halaal or not. We will also discuss if we have an income which has some haraam in it then how to purify one’s wealth from the haraam. We will also discuss zakat on stocks and we will also discuss difference between stocks and bonds.

For people working in the Silicon Valley, stocks and stock options are of relative importance to them because of the vast number of tech startup companies.

We will talk about day trading.

We will discuss basic concepts so that we all understand what stocks are.  One of the most important tools in making fatwa is to have a proper understanding of the topic.

Definition of stocks
A stock is a fractional ownership of a company. Basically stock is a share or ownership of a company. So you own a very small fraction of the company e.g. its furniture, contracts etc. Since you are part owner you are entitled to company’s earnings and you may also have voting rights in the company. In the past stock certificates were given but now all is just computer entries.  

Usually a stockholder doesn’t affect the day-to-day running of the company, but you do have some rights to elect the board. You also have a right to profits and may get dividends. If you do not have dividends, then it is the assets that you have. Usually debtors are paid first, then preferred stock, then “common” stock. You are hoping for either dividends or for an increase in valuation of the stock.

Stock come from corporations. When you create a business, there are different types. Corporations are one such company and they have limited liability. What that means is that the amount of loss is limited to that put into the company. Example: Jerry McMorris managed a trucking company that went bankrupt. But you are limited only to the amount you have invested into the company. Even though his company went bankrupt, they can not touch his company (personal money? can someone double check this). They can just get all the money of the corporation. Your goal was to make profits, but they can not come back to you beyond what is already put in to the company.

There is some question about corporations are acceptable -- in particular because it means that there may be some injustice in being able to access the personal wealth of people. There’s an unlimited upside and a limited downside. The majority opinion is that it is acceptable.

Now we have created this corporation and we want to grow. We have two options in front of us. It is debt or equity. The company can issue stocks or bonds. The bonds are simply debts. One buys the bond and it is just like Ribawi transaction since you get a fixed rate of return.

Stocks are a form of partnership, but you are putting yourself at risk. There is much less risk in bonds due to the fixed rate of return. But that is the reason that stocks pay more than bonds -- as a whole on average. Is this risk the same as gharar so is it haraam? There is gharar, but there has to be risk, this is different from buying and selling. For it to be an investment there has to be risk. The important issue about allowable risks is related to how the contract has been structured or written, is it complying with the restrictions of shariah. Common stocks are (in the majority opinion) halaal because of the risk associated for the person buying the stock. And also economic markets are trying to reward risks.

Common stock vs preferred stock: most of the time the buying is of common stock. It usually yields higher return because of greater risk. They are last to be paid.

Preferred stock has some ownership of the company just like the common stock, but many times the preferred stock does not come with the same voting rights as the common stock, however the preferred stock owners get a guaranteed and fixed return. When you own bonds, you do not own the company or have any voting right and the rate of return is less than stock ownership, but in case of bankruptcy bond owners get preferential treatment compared to stock ownership. They are callable -- in other words, at any time the company can purchase the shares back. Preferred stocks are between bonds and common stocks.

A preferred stock that has fixed guaranteed dividends forever, is this halaal? So if it is a fixed dividend, then it is a ribawi transaction. So be careful when you are buying stocks and what kinds of dividends are promised. There are also different classes of stocks, class A, class B. So a stock that promises a fixed dividend is haraam on its own.

Primary market (buying from people directly) versus secondary market (stock markets). When you buy a stock at IPO the money goes to the company, but in the secondary market, it goes to the previous owner.

Footnote: What determines the price of stocks? The economists are unable to determine what drives the price, that is the reason why they die broke (joke).

The price of a stock is not necessarily tied to supply and demand...?

What are Islamic indices?
It is a sign that Muslim scholars have looked at investment into corporations and determined that there are issues related to investing in the companies. We will study how they have worked around those issues and what is the shariah evidence for their workarounds.

2012-09-02 Class Notes


Sharika al Musahmati - Ownership based on shares
Let us say we have a limited liability company.  And we will assume for the time being that there is no Shariah issue with it being a limited liability company. And we assume in our scenario that individuals want to purchase shares (or invest money) in the company and they expect in return dividends that is not fixed from the company. There is risk involved in ownership of stocks of the company. Stock owners also get a silent ownership in the company since you are not involved in the day to day operations of the company. You also get voting rights in the company’s board. The ownership can appreciate over time. The most that the individual can lose in the above scenario is the money invested in the company. This is called Al-Sharika al Musahmati.

Is this permissible from the fiqh point of view? From the fiqh point of view does it look permissible from Shariah perspective?

What is the principle in fiqh in matters of new business arrangements?
The qaeedah or legal maxim is one of permissibility of a new or novel business transaction or model, unless there is evidence to show otherwise (i.e. that it is impermissible). As a model, if this is OK, then in an Islamic State we can have a stock market. However, we are not living in an Islamic State, we are not given Islamic Law and we do not have a given that all Muslims are ethical, for example our case in USA.

When would you not invest money into a company?
We have discussed the model that lays out the principal elements of the transaction. Now let us discuss under what conditions would you be not willing to invest into that company?

1. Business Activity
In order for your to invest into a company, you have to invest into something that has a shariah value, there are many examples of things that have no shariah value such as the following mentioned by the students: Alcohol, Riba, Excessive Gharar (risk), Casino, insurance, Pork, Haraam Entertainment, Spying (e.g black water), Pornography, illegal drugs, Tobacco, non-Green industry, GMOs, etc.

Lots of the companies are conglomerates and they might have their hands into many different ventures, should we completely avoid any company that engages in business related with what we indicated as forbidden in the above list. Do we say the major activity should be 50% halaal? How many say that it should be 0% of the activities that we have listed above? How many say it should be 5%? How many say it should be anything less than 50%?

Why did we choose 5% of forbidden activities can be allowed?
Some students said it was due to the entire system being based on riba and it cannot be avoided. Some students made an analogy that impurity in small amounts can be allowed, so small impurity in wealth may be allowed.

If we entered into a partnership with another Muslim who owns a gas station and 5% of his income is from sale of alcohol, would you enter into such a partnership?  How many of you would not accept such a partnership.

One student mentioned a case where ownership into a restaurant which did not sell alcohol but allowing their customers to bring in their own alcohol required the owners to obtain an alcohol license, and he walked away from such a partnership.

So why would you not accept such a behavior from yourself but would allow even 5% of these forbidden activities by companies you would invest into?

Shaikh is not convinced by the macro principles invoked by people that say 5% of forbidden activities can be sanctioned. The macro principle or the big picture is that you are in a system that is not Islamic and that you cannot avoid it. Shaikh also mentioned the comment about supporting mom and pop businesses which we know exactly how they derive their income and compared them to large corporations that have their fingers in many pies and we cannot really claim that they have no income from forbidden activities?????

So if someone comes up with an Islamic Fund or Index and they say that they allow a 5% of income from haraam activities, we have to question them and ask on what basis could they say that 5% is allowable.

So the summary question is that can there be a limit (in percentage) of haram involvement in business or it has to be zero percent.

2. Riba Income
Any smart non-Muslim company would invest their cash balances into interest bearing account. Companies like Apple, also have cash somewhere which collects Riba and as co-owner that can come on the Muslim’s balance sheet.

So in this category we have companies that are involved in completely halaal activities but they are getting riba income. How does this affect the investor? It might be reflected in the stock price or your dividend income based on this riba income.

What is your level of acceptance for riba income? Quran is very harsh on consuming riba.
Should it be 0%, 5%, 33%? Companies have large amount of cash and they are not investing their funds, they are hoarding cash and a lot of their income is interest.

There is no way you should be able to accept any income that is from riba. It has to be 0%

3. Riba Debt
Many companies even though they have cash on hand, they have a line of credit at the bank for their daily operations.

4. Ethical Practices
Activities such as sweat shops where they treat their employees very poorly, some who use cut throat practices. We could also include ethical Muslim practices.

5. Political Affiliations

Next week we will discuss the Dow Jones Islamic Index and figure out the logic behind what they are doing. So far it does not look good for investments into companies in the Western world.




2012-09-09 Class Notes

Why are we studying these details about stocks in this class on Islamic Finance?
Hiding your head in the sand and not knowing this knowledge is not an excuse. You cannot use intentional ignorance as an excuse in front of Allah swt according to a ....  If you have ability to have access to knowledge and choose not to educate yourself then you cannot use ignorance as an excuse.

Ibn al Qayyim mentions that ignorance is excusable unless the ignorance is intentional then it may not be an excuse in front of Allah (swt). So when you are getting into stocks, or home financing etc., then you should look into this and understand the situation fully. Base your decision on sound understanding of the Quran and Sunnah. In regards to the wealth, shaitan can confuse you especially when everyone is doing it. This is where the knowledge becomes important as it brings tranquility in your heart. It is important to know the status quo of what is going on out there.

If you decide to get involved into these matters, then you should know clearly what is involved and you will be able to guide yourself accordingly. If you decide to avoid these matters because of what they contain, then you should do so based on sound knowledge, especially in the matters of wealth. Allah swt has reminded us that wealth and children can be a fitnah.

Shaytan will come and tempt you, unless you have sound knowledge to fight the temptations. Knowledge gives you tranquility. Once you know what you are doing is correct and it is based on sound knowledge, then your heart will be in peace and tranquility and you will not be tempted.

You should also know what is going on around us. And insha-allah the future generations will be able to change what is around us.

Last week we discussed what companies would we not invest our money or get involved in during our classroom discussion, see the copy of the image of the board in the previous week’s notes.

It is clear that you cannot go and buy stocks in any company without doing some research, since there is bound to be some haraam. You have to spend some time to determine which companies are halaal for Muslims to invest.

Rashid Hussain Islamic Index (RHD) was started in 1996 in Malaysia.  Not sure what happened to it. In 1999 a meeting was held in Bahrain and Dow Jones Islamic Index was formed. The Kuala Lampur Islamic Index was started in April 1999 and at the same time the Footsie Islamic Index was started. There was Jakarta Islamic Index in Indonesia around the same time.

These indexes tried to determine what are permissible Islamic stocks. They all used different criteria.

The Jakarta Islamic Index which started in 2000 as of today has 30 Indonesian Companies. Their criteria are very interesting. This is their criteria, Share must be listed for at least 3 months, the annual and midyear obligation asset ratio (which means debt) must not be more than 90%, ranked in top 60 shares based on last year’s market capitalization rate, and ranked in the top 30 based on last year’s liquidity rate. All they care about the ranking. We will not discuss this at all, since it is not the biggest nor is it ...

DJIM Index of Companies that are deemed to be permissible to invest
Biggest and most important one is by far, DJIM (Dow Jones Islamic Index). Whole family of indices, US which has 54 companies. And then Middle East, Europe etc. And then you have different indices which consists of the following:
- Global small cap index
- US index
- Fixed income index or the Sukook Index

They have received numerous awards from many institutions specifically for their Islamic or Muslim aspect.
December 15, 2011 Dow Jones Indexes was named “Best Islamic Index Provider" by  Islamic Finance news, for the fifth consecutive year. January 31, 2012 Dow Jones Indexes was named “Best Islamic Index Provider of the  Year in Malaysia” by Asia Asset Management.


Criteria of DJIM
We will present the criteria of the Dow Jones Islamic Index (DJIM) and then we will discuss whether or not companies listed in the index can be judged to meet their criteria, then we will discuss the shariah .... and then the opinion of the scholars.

DJIM Supervisory Board
All funds, etc have a Shariah Supervisory Board. These boards have respected scholars that have reasons for their opinions.  

The members of the DJIM supervisory board are:

- Sh. Nizam Yaqubi (B.A. McGill Univ. in Economics and Comparative Religion, he has studied in India, Morocco as well, was a regular khateeb in Bahrain, he had been member of few Sharia Supervisory Board,  he has book on Repentance, a book on right of parents).

- Mohammad Daud Bakar (Ph.D. from Univ. of St. Andrews in England, Deputy Rector of Islamic Univ. of Malaysia, he is on number of boards and financial institutions in Malaysia).

- Muhamad Elgari (Ph.D. from UC Berkeley in USA, he was on King Fahd University faculty and board)

- Abdul Sattar Abu Ghudda (Shariah degree from University of Damascus, M.S. in Uloom al Hadeeth from Al Azhar and Ph.D. also from al Azhar in ….., He is European Council of ….Research)

- Yusuf Talal DeLorenzo (M.A. in Islamic Studies from Jamia Ulum al Deen in Karachi, Ph.D. from Hartford Seminary, books translated Adab al Mufrad by Bukhari, among few other books).

DJIM Criteria
The easiest first step is to look at the business activity of the candidate. They came up with six broad categories and then these broad categories are broken into further sub-categories.

Criteria #1: Business Activities - Impure sources < 5%
The six big unacceptable ones are:
- Alcohol (consumption)
- Tobacco
- Pork related products
- Interest based finance industry including banking and  insurance
- Weapons and defence
- Entertainment (which includes hotels (since they have immorality issues of all sorts today), gambling, pornography, music, cinema etc.)

They say that impure source of income cannot be more than 5% of the total revenue.

There is some complexity with “degrees of separation” -- example: airlines serve alcohol, what about aircraft makers? The plane will be sold to someone who will serve alcohol on it.

Hence hotels are problematic because of alcohol, but also because they do not require couples to be married. Examples of  prohibited categories: 5533 -- media agencies, 5555 -- broadcast television

Criteria #2: Financial Ratio - Debt to Total Asset Ratio < 33%
The Total Debt to Total Assets ratio should be < 33%. This is Debt to Asset ratio, here one takes the total debt = short term debt+current portion of long term debt + long term debt. So the Debt to asset ratio being discussed here has the Riba aspect to it.

Since we get this information from the balance sheet of the companies, they have to list using the same terminology in the criteria. Since this deals with riba, we are interested in this criteria. They say that this ratio should be less than 33%. One person mentioned that if the prohibition of interest was taken seriously then there would be no companies left to invest in.

Footnote: If the stock of a company tanks, then the assets of the companies falls accordingly, then their debt/asset ratio would force the company to be removed from the list. This criteria would make you invest in companies when their stock price is high all other things being equal. ....

Criteria #3: Financial Ratios - Accounts Receivable to Total Asset Ratio < 33%
The Accounts receivables to total assets ratio must be < 33%  Accounts receivables is related to Riba income. They add that a muslim investor must express their dissatisfaction in this kind of income at the general body meeting. THis would make sense in an Islamic country such as Indonesia, but highly unlikely for any investor to stand up and state this in the US.

Criteria #4: Financial Ratios - Interest income is Liquidity overshadowing the total assets. (Cash+Interest bearing securities) to Total Assets Ratio < 45%
To be included in the DJIM list it must be less than 45%. Somebody mentioned that on their website it says it must be less than 33%.  

If the company has no physical assets, it is just cash, then the only value you can give to the stock is the face value of the stock. Since in shariah if you are exchanging money for money, then there cannot be any increase. And if you invest money in this type of company, then you are paying money for money, then you are forced to pay the face value. But stocks are priced on expectations and not based on what the company owns.

So the DJIM says that in order for companies to be listed they should have some number of illiquid assets, in order to ascertain that you are not investing into a company that only has cash assets, otherwise you are buying just money and not buying stock of the company.

So the number 45% for inclusion is really to be on the safe side and to make it less than 50% of the companies ..... since it fluctuates so much.

These are all the criteria, and if a company fulfils this then DJIM will consider it permissible.

From the Shariah perspective can these criteria be justified?

2012-09-16 Class Notes


We are discussing stocks and trying to identify what some people call shariah compliant stocks. We are seeking to understand what are the criteria for what they claim to be shariah compliant stocks, then we will critique them and see what scholars have said about them.

We discussed the criteria for inclusion into the Dow Jones Islamic Index:
1. Less than 5% of the companies revenues from haraam business activities
2. Total Debt to Total Asset ratio must be less than 33%

Issues for the financial ratios: In order to be compliant with the Shareeah if you must sell debt, then you sell debt at its original value; So if I owe $100 and then I cannot go to a person and say that you pay me $80 dollars now and then the person who owes me will pay you the debt of $100 then that is not allowed in Shareeah. Another issue is how much debt do they have on their books.

Footnote: Dow Jones has changed their criteria, in their most recent changes that were in 2003, they have updated their limits for the various financial ratios.

3. Liquid Assets to Total Assets (this is sum of cash and interest bearing securities divided by 12% interest of market capitalization) has to be less than 33%

4. Account receivable to total assets ratio has to be less than 47% (used to be 33% before 2001).

5. Non operating interest income over operating income ratio must be less than 9%. This ratio captures how much of their income is from interest. If the company has all of its assets in money then you are basically dealing with interest.

It is important to recognize that the cutoff numbers have changed over time.

Criteria for inclusion in Malaysian Islamic Index
In Malaysia, the Securities Commission of Malaysia, they have a number of different Islamic Indexes and they also have a Securities Index.

1. They have a screening process that starts with business activity. They start off with allowing upto 5% of Haram businesses (in Malaysia there are lots of companies which have lots of debt which is considered Mudharaba in Malaysian banks).

2. They next look at degree of separation for the haraam business activity. So if the activity is haraam but they cannot avoid it, then they allow upto 10% of haraam activity. The examples are tobacco and gambling.

3. They next allow 20% haraam activity from rental activity. Such as a landlords of companies that participate in haraam activities.

4. They next allow 25% of haraam activity in cases of maslaha, such as hotels and resorts?????

They say that 84% of the companies listed in Malaysia Islamic Index are shariah compliant.

When you apply Dow Jones conditions to Malaysian markets then you go from shariah compliant from 84% to 4.6%. Just changing the definition a little can have significant changes in numbers, as you see here.

Criteria for inclusion in UK FTSE Islamic Index

They also have a shariah screening criteria.

1. Business activity, they list numerous business activities that are similar to the Dow Jones Islamic Index. It has to be less than 5%

2. The cash to assets ratio has to be less than 33%

3. The liquid assets to total assets has to be less than 50%.

4. Account receivable to the total asset has to be less than 5%

5. Purification Ratio is 5%. This is for the possible haram money which has gotten into the wealth.

Looking from this perspective the FTSE Islamic Index is stricter from other indexes.  

Criteria for inclusion in Standard and Poor’s Islamic Index

They also mention business activities and specifically exclude media except news and sports channels. They also do not allow trading of gold and silver as cash on a deferred basis, they are looking for the time component for these transactions. They also accept any company that has a Shariah supervisory board.

Their criteria are very close to the FTSE and they also have a dividend purification scheme. They take dividend income and multiply it by (non-permissible income by ......) in order to remove the haraam


The AAOIFI (Accounting and Auditing Organization of Islamic Finance Investments) Standards for Islamic Investments

When it comes to standards for any Islamic field, they are considered to be the most important referee.

The bylaws of the company cannot state that it is going to deal with Riba or other haram things like Pork. A company cannot state in its bylaws that it will deal with interest or pork.


1. The total non halal income must be less than 5%. It is not clear whether it is haraam or interest income, they state it as non halal income.

2. Cash to assets ratio must be less than 30%

3. Liquid assets to total assets (they do not mention anything about this).

4. Account receivable to total asset ratio less than 30%

5. They just say that a person should purify their money.

We would have expected AAOFI to have more specific criteria and more stricter conditions for inclusion into an Islamic Index. Anything they do is non-binding, they have no legal authority other than Bahrain, but most people will look at their criteria as a fatwa.


Criteria for inclusion in Bank al Bilad’s Islamic Index

In their resolution #....., it states

1. the company does not deal directly in haram business transactions (Ribawi bank, Alcohol, Tobacco, haram entertainment etc....) has to be strictly 0%.

2-4: All the various financial ratios that we have listed above have to be 0%.

Footnote: In a fatwa posted on AMJA website, it mentions that Sh Salah as Sawi was asked a question regarding this and he said that we do not allow Ribawi transactions, Alcohol, Pork, Weapons and Defence etc. (this opinion is on AMJA web site but it is not the official opinion of AMJA). Do you think that Sh Salawi would make such a statement and not mention the other financial ratios?

The opinion above gives the impression that only the business activity is the only important criteria and does not mention the others.  

Discussion about degrees of separation
Almost anybody can use a halaal thing for haraam. somebody could use Qur’an for haraam purposes. And there is a difference in the use of a thing, such as a phone versus hotel rooms. Hotels supply alcohol and make money from haraam entertainment in the rooms, they are directly benefiting from it.

Notice in all the criteria the numbers are arbitrary. We will discuss their “shariah reasons” for giving these numbers in the future, inshaAllah.

There is a mention of a new software which is much better at screening the companies. They say that the deeper you go in then you find less haram and their criteria stands at 75%. Their logic is also very problematic.

Shariah Capital Screens: They claim that according to the criteria of DJ, 56% of US companies is halal.

There was lot of discussion about degrees of separation in the classroom, Sh mentioned that nobody is forcing you to become a co-owner of a company and that a co-owner has more responsibilities than an employee of the company. So here the onus is more on a person who is a co-owner of a company to ensure that they do not have any indirect transactions that can lead to haraam activities.

2012-09-23 Class Notes

InshaAllah today, we will finish discussing the criteria behind stocks and some of the practical aspects of stocks and then we will discuss the shariah evidence for their views and the basis for the criteria.

When we buy stocks in companies that are non Islamic, the companies are going to be run not according to the Islamic principles, they are going to operate according to their culture. Even though they might have cash on hand, they would still purchase using financing or leasing and they would consider themselves to be stupid to not earn interest on their cash reserves.

Originally, every scholar said that dealing with these companies is haraam. And then the argument of maslaha started, some people pointed out that these are equity based investments and in Islam we prefer equity based investments and not debt based investments, since you are risking a loss and not using simply using money to earn money, by earning fixed earnings.

If you accept the idea of limited liability corporation, you could have a very pure and nice Islamic stock market. But the economists pointed out that these equity based stocks are much more Islamic than some of the bank schemes. Lots of those Islamic bank schemes are debt based and they are not equity based. These banks are just getting around Riba issue through some ingenuity ways. They also argue that even if a company in the Muslim part of the world, and just use Islamic terms (like Mudaraba) then these banks are not really ready for that. So the idea of compromise started to develop and they started to talk about what is “Shariah tolerant companies” (a term coined by one of the authors) rather than Shariah compliant stocks. So they argued that some compromise has to be tolerated and this is what brought Meezan bank, Dow Jones (Islamic) etc. Some of these screening companies do not lay down their criteria.  

In Mutual funds it is very difficult to find out what is the criteria for inclusion in the portfolio, which are handled by various portfolio managers, they do not publicize their criteria at all. Dow Jones and Malaysia Security Index and Meezan bank of Pakistan make it very clear. Out of those three, the Dow Jones Islamic Index is the most conservative and then comes Meezan and the most innovative and accommodating is the Malaysian index. The least accepted companies would be in Dow Jones and the most accepted would be in Malaysia index.

Almost every scholar or economist says that there are lots of problems with these criteria. In other words, they are trying to open the door but they are puzzled as to how to develop some kind of criteria.

Note that none of these looks at who the customers are of the product that the company produces (e.g. producing bottles is halal, but if you are selling to beer companies, then that is not halal). It is this second level of who they are producing for is not examined. Another thing that is not looked at is investments in non-halal producing goods. So it is a very limited criteria. For example, a printing company. In general it is halaal. However, lets say that they publish ‘satanic verses’ by Salman Rushdie, then can we invest in such a printing company. Problem is how are we going to even find out that the printing press published such a book which is Islamically haram to publish. These are the questions the above screening companies do not ask. These questions are hard but they need to be asked since you are trying to invest in order to make money and if money comes from haram sources then we are in problem. There is a hadith of Prophet (pbuh) which says:

Sunan an-Nasa'i > Book of Drinks > Hadith permalink
... It was narrated that Abu Al-Hawra' As-Sa'di said: "I said to Al-Hasan bin 'Ali, may Allah be pleased with him: 'What did you memorize from the Messenger of Allah [SAW]?' He said: I memorized from him: 'Leave that which makes you doubt for that which does not make you doubt.'" (Sahih) ...

أَخْبَرَنَا مُحَمَّدُ بْنُ أَبَانَ، قَالَ حَدَّثَنَا عَبْدُ اللَّهِ بْنُ إِدْرِيسَ، قَالَ أَنْبَأَنَا شُعْبَةُ، عَنْ بُرَيْدِ بْنِ أَبِي مَرْيَمَ، عَنْ أَبِي الْحَوْرَاءِ السَّعْدِيِّ، قَالَ قُلْتُ لِلْحَسَنِ بْنِ عَلِيٍّ رضى الله عنهما مَا حَفِظْتَ مِنْ رَسُولِ اللَّهِ صلى الله عليه وسلم قَالَ حَفِظْتُ مِنْهُ ‏"‏ دَعْ مَا يَرِيبُكَ إِلَى مَا لاَ يَرِيبُكَ ‏"‏ ‏.‏

So these companies come up with subjective percentages which we do not know how to accept.

Footnote: If there is no doubt that they are doing haraam then you can resort to Wara’a, but here we are discussing  companies that are not Islamic (and we are not talking about non-Islamic companies since e.g. printing press is an Islamic company but possibly not Islamic in the West if they print haram stuff) and they do not have to follow shariah.


So even the first criteria of excluding companies that do not follow the list of permissible activities is problematic, since we truly cannot determine or check whether what they are doing is really compliant with the shariah. We discussed the case of a printer, are we going to check each and every book that is printed by them and how much revenue is derived from each of the books.

Footnote: One way possible is that if lots of Muslims were co-owners so they can use their large number to keep the company according to Shariah. So going back to the printing press, if lots of Muslims were co-owners then they can put a strong check on the press so it does not publish anything haram.

Muslims are investing a lot of money and that is the reason why these financial companies are bringing out Islamic financial vehicles, but they know that we compromise on our principles and they are willing to overlook them.

Other criteria such as market capitalization (market capitalization = Stock Price X # of Stocks)  is also problematic. What does this number really mean? It is not a physical or tangible asset, it can fluctuate very rapidly, it can go up and down, and it has a tendency to follow the trends of the entire market. So this number has no meaning and can a number based on this number be meaningful?

There have been many dissertations on Islamic Indexes, this is a fad in Economics departments. How have the Islamic companies fared compared to the other companies, is one of the topics for the dissertations. An interesting data is that when market did well the Islamic Index did very well compared to other indexes, but if the market did poorly then the Islamic indexes fared worse, So there was a lot of volatility and it did worse in the beta. And market capitalization based criteria forces the Islamic indexes to buy companies when they are doing well and sell when they are doing poor, because the market capitalization dictates them to do so.

Harvard University had many Islamic forums a little while ago (they still may have some) where they discussed companies which are according to the DJIX. Sh. Abdul Hameed took 28 companies in the 3rd forum and some of the conclusions are:

1) The debt ratio, 23 out of 28 debt levels are higher than the ones allowed by DJIX debt ratio. 19 of them were above unacceptable debt ratio.

2) Of the 72 international companies only 3 firms that met the DJ criteria.

3) Out of sample of 28 US and 27 non-US companies, only 18 had acceptable level of debts.

4) When it comes to interest bearing debt, out of 28 US companies, 8 did not meet the DJIX criteria.

Shaykh mentions there are many issues with the stocks. He also makes a point that if we make compromise then how are we going to bring about change. So better alternatives that can be developed (rather than compromise) is a better way rather than the compromising ways even given to us by the so called Shariah boards.  

Now we get into what other scholars say.

2012-09-30 Class Notes


At this point we have seen some of the criteria that people set for buying stock. We analyzed the criteria and problematic issues regarding the criteria. Now we go into details of supposed evidences behind these criteria.

Corporations can be divided into three categories according to various ulema. A lot of ulema accept the concept of limited liability or some of them are not aware that this concept also applies when you buy shares.

1) Output and Behavior is Islamically sound. All Ulema agree that buying stocks is halal in such companies. Only person who does not agree is Yusuf an-Nabahani (but Nabhani is known to have opinions which are outliers and goes away from the mainstream Ulema of Ahl us Sunnah).

2) Output of company is haraam and it is haraam to invest in these kind of companies.

So these two categories are the extremes and we are not that interested in the two extremes, since their ruling is mostly clear..

3) Companies that have some mixture of haraam and halal output and behaviour. They might be dealing in riba. These kind of stocks are the ones that are debated a lot by scholars. The vast majority of what they produce is halal.  And there are three opinions about buying stocks in these kind of companies.

Opinion #1: It is haraam (La Yajooz i.e. not allowed) to buy stocks in these category of companies.

Opinion #2: It is permissible uncategorically (mubah)

Opinion #3: It is permissible (mubah) given certain conditions.

We will discuss many scholars and their evidences. This will include scholars who are distant from industry versus those scholars who are somewhat involved in the industry.

Opinion #1 (Haram)
The Majma Faqih of Rabitat al Alam al Islami’s resolution + majma faqih of OIC + Standing committee of Islamic Iftah+ supervisory board of Bayt al Tamweem of Kuwait + Shariah Board of Bank al Dubai al Islami + Bank al Islami Sudani

Among individual Ulema this is opinion of bin Baaz, ibn Uthaymeen (with conflicting Fatawa), Abdullah ibn Ubaya, Ali al Aloos, Yusuf al Shubily (was leaning towards it in his Ph.D. dissertation but now has alternate view).

Opinion #2 (Halal)

It is mubah unconditionally, it has been discussed by few scholars but Shaykh does not know of any scholars who hold this opinion. However, still it is important to discuss the evidence behind it that is presented.



Opinion #3

Supervisory board of Rajhi company (Saudi Arabia), Shariah supervisory board of Bank al Islami al Urduni (Jordan).

Among individual scholars,  this is the view Ibn Uthaymeen, Abdullah Al-Manee, Yusuf Al-Qaradawi, and Yusuf al Shubily after his dissertation.  But the scholars do not agree on the conditions.


Evidences Opinion #1

First piece of evidence is every hadith and ayah related to the forbidding of the Riba. We discussed in an earlier quarter and looked at all these evidences and we saw how tough and strong  the language is regarding Riba. Some scholars do not permit riba even in case of necessity.


يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِن كُنتُم مُّؤْمِنِينَ

Sahih International
O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers.

فَإِن لَّمْ تَفْعَلُوا فَأْذَنُوا بِحَرْبٍ مِّنَ اللَّهِ وَرَسُولِهِ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَالِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ

Sahih International
And 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.

وَإِن كَانَ ذُو عُسْرَةٍ فَنَظِرَةٌ إِلَىٰ مَيْسَرَةٍ ۚ وَأَن تَصَدَّقُوا خَيْرٌ لَّكُمْ ۖ إِن كُنتُمْ تَعْلَمُونَ

Sahih International
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.

There is a hadith in which Prophet (pbuh) cursed one who took Riba, paid Riba, witnessed the contract or wrote the contract. This is how serious is the issue of Riba.

In the stocks, it is type of Sharika which is like Wakala (where you are giving certain responsibility to someone else since one does not become the CEO or president of the company by buying stocks) so the CEO etc are acting upon on your behalf. In Shariah, if someone is made a wakeel then one is responsible for his decisions. This is agreed upon by all 4 Madahib. So if the wakeel is doing the haram and it is in your knowledge then you are responsible if you do not stop this.

Footnote: Response to the first groups argument is by Yusuf al Shubily who disagrees. He thinks that corporations have their own identity and one is buying stocks which are independent from the company. Shaykh Jamaal disagrees with this opinion and considers his arguments weak. One problem is in Shubily’s view now one is not buying stocks but is exchanging money for money. Second is stocks in reality make you a co-owner in the company and there is no way one can bypass this fact. Check out the website in Arabic [www.shubily.net].

Another evidence is that one is helping out what is sinful which is forbidden by the verse in (Surah al Maida, verse 2):

وَتَعَاوَنُوا عَلَى الْبِرِّ وَالتَّقْوَىٰ ۖ وَلَا تَعَاوَنُوا عَلَى الْإِثْمِ وَالْعُدْوَانِ ۚ وَاتَّقُوا اللَّهَ ۖ إِنَّ اللَّهَ شَدِيدُ الْعِقَابِ

In the time of Umar (ra) someone was selling Khamr, so Umar (ra) cursed him and said did he not hear Prophet (pbuh) that the fat of animal was forbidden so they melted it and still sold it in the market.

Report from ibn Abbas (ra) who was asked by someone who got into partnership with a jew and christian and ibn Abbas (ra) said do not get in partnership with jews, christian or majoos since they deal in Riba. [Note: This hadith is not authentic]

Homework Question: Where is the Maslaha (benefit) and Mafsada (harm) here?

2012-10-07 Class Notes


We are discussing the scholarly views on stocks (either the companies  produce something that is haraam or the way they conduct their business using haraam means), there are three different opinions on this topic:

Footnote: The above discussion is only for companies that are questionable either due to haraam products or services or the means that they use to earn their money, If they do not have any haraam then there is no question about purchasing stocks in those companies.

Opinion #1: It is not permissible to buy stocks in these companies. The scholars use the following evidences for their opinion.

Evidence a. Everything related to Riba is forbidden.

Evidence b. Cooperating in sin is forbidden.

Evidence c. Masalih and Mafaasid - The basic argument is that riba is a harmful thing according to the quran, it is a mafsidah, due to textual argument from the Quran. There is no counter evidence that can overturn it. By defn, dealing in riba is a mafsidah and you cannot invoke any maslahah in it.

Evidence d. Legal maxim: Haraam takes precedence when there is halal and haraam is mixed.

SO if you have wealth source and you cannot distinguish between halaal and haraam, then you have to avoid it.

Evidence I: Legal Maxim - Repelling evil takes precedence over bringing benefit.

There is inherent conflict between maslahah and mafsadah, and that avoiding mafsadah takes precedence over maslahah.

If the company is involved in riba and it spreads everywhere and you cannot say with certainty that riba does not taint any source of income.

Let us say that a company depends upon govt loans for the major machinery required to produce something. And you cannot separate the riba aspect from everything else, and you cannot say that you can purify the earnings of the company by removing a certain percentage, since the sole mechanism by which the company earns its money is from riba.

Almost all of the companies are based on how they resorted to riba. And it is very difficult for you to separate from that foundation of riba.

Opinion #2: These kinds of stocks are halaal unconditionally. For the first opinion at least there is some text to back it up. Here in the second opinion they begin with the legal maxim only: “Something may be considered permissible if it is part of a larger base transaction which otherwise would have been haram as a transaction alone”. For example, say someone tries to sell the baby of the camel while it is still in the womb. It is not allowed to sell a baby which is still in the womb (too much Gharar). However, I can sell the pregnant camel. So the Qaedah is saying that the baby in the womb sold as a secondary item now is overlooked. However, some scholars have said that Riba is haram under all circumstances and the baby camel is only haram in the womb. So the people of Opinion #2 are misusing the Qaedah.

If you have a lot of wealth and if small amount of haram is mixed with large amount of halal (permissible) wealth then it is allowed to deal with such wealth. Ibn Taymiyyah says that haram mixed with halal is of two types:
1. Where the haram aspect haram in of itself, e.g. you enter butcher shop and he tells you that 10 animals are lined up that 7 are Zabiha and 3 are Mayta but which one is which we cannot tell. So here all of them become haram since we do not know which one is which.
2. If haram is due to external reasons. Let’s say someone has all halal animals but 2 are stolen, 2 are through Riba. So all animals are Zabiha but some of them have come to butcher through haram means and we cannot tell which one is which, so here if one cannot tell the difference one may buy the meat. Here since animal is Zabiha, it is not haram in of itself. It is the Ribawi contract, through which animal was bought by the butcher, which is haram.

However, the 2. above cannot be used for stocks, since in the Zabiha case the buyer is not part of the company becoming part of the haram. While buying stocks makes you part of the company.

Opinion #3: It is permissible to buy stocks given certain conditions.
1. Their first argument is a Qaeda that “general need is to be treated in the same way as a specific necessity”. Most Ulema do not accept this Qaedah. Ulema ask first prove it that investing in stocks is a need. Most of the people invest in stocks when they have extra money to invest in the first place. The Qaeda is also problematic, since necessity means a dire need i.e. a need which unfulfilled makes life very difficult (risk to life, wellbeing).  Hanafi scholars distinguish between Haram Li Dhatihi (haram in itself) and Haram Li Ghayrihi (leading to haram). Examples of first are Alcohol, Gambling etc. However, in the latter part it is somethings which is not that bad in of itself but it can lead to other types of haram in the society e.g. covering of Awrah and modest dressing for men and women is an example of this since it can lead to zina.

Ahmed al Zarqa is commenting that what is allowed in need is the one in which there is no explicit text is forbidding it. One cannot apply this to what the text explicitly forbids. It can be applied only to where ijtihad has lead one to believe that it is haram.  

Next piece of evidence is Qaeda: “what you cannot escape from is excused”. This one is more accepted by the Ulema. If something afflicts everyone then it is hard to escape so Qaedah provides for excuse for those cases. The stocks are escapable in the first place. If some company requires you to have stocks as part of the employment then....... (technically no company can ever require you to have stocks as part of your employment).

2012-10-14 Class Notes


We are discussing scholars opinions about the permissibility of owning stocks. The third group of scholars who think it is permissible to own stocks under some circumstances.

Arguments for conditionally permissibility of purchasing stocks in companies even though they are not shariah compliant
Scholars who say that it is permissible to own stocks under some circumstance, state the following arguments:
1) Qawaa'id: General needs are like necessities
2) Qawaa'id: What you cannot escape is overlooked
3) Maslahah: Investments all non-Muslims, no place to invest your money, opportunity cost =>$
4) Story of Khaybar

Earlier we discussed the opinion of  scholars who say it is permissible to own stocks, and they quote the following qawaa'id, tabih tabih, if you cannot separate something from something else, then what you buy is permissible. For example, if you buy a pregnant camel and since you cannot separate the fetus from the womb, when you buy the pregnant camel, you have also bought the calf.

A Muslim has to be aware of where he is getting his money, he cannot say I purchase stocks and I do not care how they earn the money.

Questions raised by opponents of opinion that it is not permissible to buy stocks in companies that do not follow shariah:
a. If you say that stocks are haram, then you are preventing Muslims from participating in Economic activities of the society either for non-Muslims or bad Muslims.
b. If you do not allow investment in these companies then you will be denying Muslims good economic activities since we cannot find Riba free companies.
c. If you do so then Muslims will have lots of monies which they will not know what to do.

So basically they are saying this is Maslaha since Muslims will be losing opportunity costs. They are basically saying the Muslims are losing money by not investing in the stocks, this is pre-financial disaster thinking when generally the stock prices were on the rise.

Classroom discussion:
Classroom discussion about the above questions raised by those who think that we should be allowed to invest money in the stock market.

One good point that came in classroom discussion is that “invention is the mother of necessity”; i.e. if you start investing into this then Muslims will not work hard in finding the alternatives.

This is a big problem for the muslim ummah as a whole, we know as the Western Financial system is not a good system, and we should find a way to get out of the system, instead we try to find ways to enter the system.

Islamic banking is a billion dollar industry and they are making a lot of money from these schemes, so they do not have an incentive to find a way out of the Western financial system. If you stop this revenue stream then they will try to find better alternatives.

Some scholars say that this is not a good system, but it should be accepted in the interim. What do you think about this opinion, that you can accept it in the interim.

You are setting a precedent by following it even in the interim, so do you think they will try to get rid of it.

It’s harm is more than the benefits.

Finding a better alternative might be a better maslaha.

From the shariah point of view, riba is mafsadah, haram wealth is mafsadah, these things are mafsadah, how are you going to argue that it is a maslaha. Riba is clear cut, strongly prohibited, it is clearly a mafsadah. It is a harm, but does it mean that it does not contain any benefit at all. Allah swt says that if they ask you about khamr and maysar, it contains some benefit but it’s sin or harm is much larger than the benefits. See 2:219 below:

يَسْأَلُونَكَ عَنِ الْخَمْرِ وَالْمَيْسِرِ ۖ قُلْ فِيهِمَا إِثْمٌ كَبِيرٌ وَمَنَافِعُ لِلنَّاسِ وَإِثْمُهُمَا أَكْبَرُ مِن نَّفْعِهِمَا ۗ وَيَسْأَلُونَكَ مَاذَا يُنفِقُونَ قُلِ الْعَفْوَ ۗ كَذَٰلِكَ يُبَيِّنُ اللَّهُ لَكُمُ الْآيَاتِ لَعَلَّكُمْ تَتَفَكَّرُونَ

Sahih International
They ask you about wine and gambling. Say, "In them is great sin and [yet, some] benefit for people. But their sin is greater than their benefit." And they ask you what they should spend. Say, "The excess [beyond needs]." Thus Allah makes clear to you the verses [of revelation] that you might give thought.

You can find a rationale or benefit for riba in the secular society. If there was no benefit, then in a true society, you will not find it.

Riba might not be the main motivating factor, but the reality is that all of the companies are based on interest based financing or income, this is the culture of the society.

#4 Argument: Story of Khaybar
Now we return back to the reasons offered by the scholars who claim that it is permissible to buy stocks under some conditions.

The first two arguments were those of the two qawaa'id, see above. The next argument is that it is a maslaha. And now we discuss the fourth argument. which is the story of Khaybar, which was a stronghold of the Jews and was defeated by the Muslims.

They claim, that the Prophet told that the Jews of Khaybar will work the farm and they owe Muslims half of the produce of dates. They think it is a form of co-ownership. However, it is not true, since it is a form of Jizya rather than partnership.  

AAOIFI talk about buying such stocks and they say it is permissible to be involved in these states due to general need, due to necessity, “if something is mostly halal then it is halal and haram is ignored”. The 33% rule comes from a hadith of Prophet about a Sahabi who only had one daughter who asked is it permissible to give away all his wealth and Prophet said no, when asked half of wealth then he said no and when asked about one third then Prophet said yes and said one third is too much.

Somehow these Muslims have applied this hadith to the case of stocks, even though it is not clear how this hadith can be used.

Going back to the principle of tab’ tabi’, which says that if you buy a pregnant camel, you get the fetus with it. They mention that you cannot go and buy the fetus. But the most important point that they are missing is that the essence of buying a calf is still halal, the problem is that there it too much gharar and you do not know the condition of the fetus.

Similarly the case of buying fruits still on the trees that has not ripened is forbidden because of the risk involved. But the essence of purchasing fruits is not haraam, it is halal. The thing that is forbidden is that you cannot purchase or sell unripened fruits that are still on the tree.

So these people should be bringing these arguments since the issue of Riba in essence is haram. So the selling of calf in the womb and selling of fruit on the tree is only circumstantially haram.

There is a concept called al Ghaban al Fahish, a severe mispricing of something. This is cheating and deception. But if you find that it was a mistake, the item was not properly valued, so either parties would be upset, can they cancel the contract if they find al ghaban al fahish. Scholars say that if the valuation of the time was greater than some amount then you can use the principle of al ghaban al fahish to invalidate the contract.

For Malikis the threshold of al Ghaban al Fahish is one third (based on hadith above); for Hanafis for non-fixed assets it is 5%. Where the Hanafi opinion comes from is not known.

The question was asked where did the threshold of 1/3 come from. The explanation is that if the threshold for invoking al ghaban al fahish is 1/3, and if that threshold is a lot for the item value, then that amount can be invoked by generality principle to other situations where you want to invoke some thresholds.

Some use the thresholds from taharah of urine mixing with water and try to use that threshold for determining impurity in earnings of a company. Remember we are not trying to benefit from water, it is a necessity. Besides this issue of water purity is a Dhabit (something which can only be valid within a fiqhi issue) and not a Qaedah (which can be used across fiqh).

If you have a direct Nuss (text), then you cannot apply a qaeedah.

A better analogy would be whisky in a cake, many of the scholars who say it is permissible to buy stocks, will not agree that eating a cake soaked in alcohol is permissible.

We should take actions based on knowledge, we do not want ignorance as an excuse in front of Allah swt, and if it is intentional, then you definitely cannot invoke it as an excuse.

Shaykh Jamaal says that based on the evidence of the ulema, investing in these kinds of stocks is not allowed. He was never offered to buy stocks nor has left over income to purchase stocks. However many of us are receiving some of our income in form of stock purchases and it is very tempting for those who are offered this opportunity to leave it.

Next week, we should discuss this and other situations unique to people who are more involved in these kind of situations, and we will discuss naseeha to each other, be frank, and then find how we can be satisfied when we walk away from it.

The problem with all of the Islamic companies that do screening have accepted the unsound screening principles that we have discussed earlier.


2012-10-21 Class Notes


This is the last class for the quarter. This lecture is more of classroom discussion and conclusions come from the students today. It looks like there will be very few notes today. We will discuss bonds and sukook in the next quarter.



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