By: Hong Kok Cheong
In equity funds, investments are made in the shares of joint stock companies. Profits come from capital gains or the dividends distributed by the relevant companies. If a company’s main business is unlawful according to Sharia, an Islamic fund cannot purchase, hold, or sell its shares.
Some Sharia experts argue that every shareholder is a sharik (partner) of the company and is an agent for the other partners. If the shareholder knows that the company is involved in an un-Islamic transaction and still holds shares in the company, it is perceived that the shareholder authorizes the transaction.
Many present-day scholars disagree. They argue that a joint stock company is different from a partnership, where policy decisions are taken by the consensus of all the partners, each of whom has veto power.
In a joint stock company, policy decisions are taken by the majority; shareholders have no veto power. If a shareholder’s objection to a transaction is overruled by the majority, then their consent has not been given, especially if they intend to withdraw from the income from that transaction.
According to Sharia rules, a company’s funds are impure if it is financed on the basis of interest or receives interest on its deposits. Some Sharia experts also believe that if a company has borrowings based on interest, keeps its surplus money in an interest-bearing account, or purchases interest-bearing bonds or securities, then the company is unlawful, even if its main business is halal.
Others argue that if a company is engaged in a halal business and keeps its surplus money in an interest-bearing account that returns a small incidental income of interest, it does not render all of the company’s business unlawful. If a shareholder intends to oppose the transaction and not use that proportion of the dividend to benefit themselves, then the transaction cannot be attributed to them.
Sometimes these companies borrow money, mostly based on interest, from financial institutions. If a shareholder disagrees with the borrowings, but is overruled by the majority, then the shareholder cannot be held accountable.
The principals of Islamic jurisprudence state that borrowing on interest is a grave sinful act for which the borrower is responsible in the Hereafter. However, this one act does not render the whole business of the borrower as haram impermissible.
How do Sharia rules apply to investment in shares? Read “The Dos and Don’ts of Sharia Investments: Part 3” to find out.
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