By: Hong Kok Cheong
Does Sharia law allow dealings in equity shares? As an investor, it’s sometimes difficult to know. In fact, dealing in equity shares is acceptable under Sharia law with the following conditions:
- The company’s main business is not in violation of the Sharia. Shares cannot be acquired in companies that provide financial services with interest, or companies involved in businesses not approved by the Sharia.
- 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 or her disapproval for such dealings.
- 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.
- The shares of a company are negotiable only if the company owns some non-liquid assets. If all the company’s assets are liquid, then the shares represent money that cannot be traded in except at par value.
Some scholars believe that the ratio of non-liquid assets must be at least 51%, arguing that if assets are less than 50% non-liquid, then all the company’s assets should be treated as liquid and therefore nonnegotiable. 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 a company has a mixture of liquid and non-liquid assets, its shares can be negotiable regardless of the company’s liquidity level, with the following two conditions:
- The non-liquid part must be a large proportion
- 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 under Sharia Law and an Islamic equity fund can be established. The subscribers to these funds are treated as partners “inter se.” The subscribers’ investments form a joint pool and are then invested into shares of different companies. The profits can accrue either through dividends distributed by the companies, or through the appreciation of the share prices.
When profits are earned through dividends, a proportion of the dividend, corresponding 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 the purification process, read the next post in our series: “Sharia rules: Is purification necessary?”