In some cases, equity shares admissible under Sharia rules

By: Hong Kok Cheong

Dealing in equity shares is acceptable in Sharia with the following conditions:

  1. The company’s main business is not in violation of Sharia. Shares cannot be acquired in companies that provide financial services on interest or companies involved in business not approved by the Sharia.
  2. If a company’s main business is halal, but its surplus amounts are deposited in interest-bearing accounts or it borrows money on interest, the shareholder must express his disapproval of such dealings.
  3. If some income from interest-bearing accounts is included in a company’s income, the proportion of the income in the dividend paid to the shareholder 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. 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.

Some scholars believe that the ratio of non-liquid assets must be at least 51%, arguing that if assets are less than 50%, then all the company’s assets should be treated as liquid. Some others believe that even if the non-liquid assets of a company are as low as 33%, its shares can be treated as negotiable.

Another view, based on the Hanafi jurisprudence, argues that whenever an asset is a mixture of liquid and non-liquid assets, it can be negotiable irrespective of the proportion of its liquid part, with two conditions:

  1. The non-liquid part must be a large proportion
  2. The price of the mixture should be more than the price of the liquid amount contained therein

Subject to these conditions, the purchase and sale of shares is permissible in Sharia and an Islamic equity fund can be established. The subscribers to the fund are treated in Sharia as partners "inter se". All the subscription amounts form a joint pool and are invested in shares of different companies. The profits can accrue either through dividends distributed by the companies or through the appreciation in the prices of the shares.

Where profits are earned through dividends, a proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic funds call this process “purification”.

To learn more about purification, read “The Dos and Don’ts of Sharia Investments: Part 4”.

Conclusion

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