in shares of companies: the Shariah way
By: Nathif J. Adam, CEO - First Community Bank
With the forthcoming IPO of Safaricom, a large number of Muslims
would, naturally, have liked to put some funds into what is regarded
one of the most blue chip entities in this country. Like all other
human beings, Muslim investors would like to have good shares and
stock of mutual funds in their portfolios. Hence, Safaricom is certainly
a tempting proposition which may not be shunned away easily and
Muslims may, therefore, not be blamed for thinking in that direction.
like all the many other temptations that we deal with in our day-to-day
lives, it is imperative that Sharia requirements are given due consideration
when dealing with such matters. What, therefore, is the stand of
the Sharia with regard to investing in the shares of joint stock
it lawful investing in stock markets? This write-up is an attempt
to clarify Islam’s stand on investment in shares and the Sharia
backings that currently drive the practice.
2) Encouragement to investment
First we need to appreciate that Islam as a deen (way of life) has
been distinguished by its continuing relevance to contemporary society
in all facets of life including economical and financial undertakings
of man which are not only meritorious but indeed regarded in many
cases as obligatory and necessary.
Qur’an is very explicit in its advocacy for trade and investing
in various passages, such as in Sura 2:275 which reads “Allah
has permitted trade…..”. Trade in this case involves
all forms of legitimate commerce including investing and trading
of company shares subject to any limitations that may have been
laid down by applicable Islamic jurisprudence.
Similarly, financial investment activities have been given exceptional
relevance by the prophet as can be seen, for instance, from the
Hadith of `Amru bin Shuaib related from his grandfather that the
Messenger of Allah said:
"Whoever is entrusted with money of an orphan should trade
with it and should not leave it sitting to be used up by charity."
The point of reference in this hadith is that the Messenger (PBUH)
urged the trustee on the estate of people who due to age (or other
reasons) cannot manage their own financial affairs, to invest it
in a business that will yield a return and make it grow until they
are in a position to do so themselves.
if proper investment is not made with such funds, the same will
be depleted by Zakat, thus leaving the orphan with little or nothing.
Notwithstanding the above deep exhortations to investment, it is
no less a truth that Muslims are required to put the tenets of their
faith into practice in all their business transactions since Allah
(SWT) Himself is witness to all their dealings. The Quran is categorical
in this regard as can be seen from the following verse:
"In whatever business you may be, and whatever portion you
may be reciting from the Qur'an and whatever deed you may be doing
We are Witnesses thereof when you are deeply engrossed therein.
[Al Qur'an 10:61]
you who believe! eat not up your (wealth) among yourselves in vanities:
but let there be trade amongst you by mutual goodwill” (4:29).
Thus, while the sources of the Sharia (the Quran, Sunna and ijtihad)
will continue to encourage the need for investment and commerce,
such encouragement to invest is not meant to override the responsibility
of the Muslim investor to abide by any limitations laid down for
3) Arguments for and against investing in the shares of
joint stock companies
Even though the format of joint stock companies, as we know them
conventionally, has no parallel in the Sharia, Muslim jurists, seem
to agree that the overall legal structure of these institutions
can be regarded compatible with the Sharia. This is so in view of
the fact that the purchaser of a share in a joint stock company
actually acquires an equity stake, which means that, as a shareholder,
the investor is actually a partner in the business. Thus, as a partner,
the investor’s equity is exposed to risk such that the investor
actually shares in either the profits or the losses of the company.
This, therefore, equates to the Islamic concept of Musharaka (Partnership)
and is regarded acceptable.
However, whether Muslims can invest in present day stock market
companies has been a matter of debate between Sharia experts for
several years in the past largely for issues relating to the following
• What line of business is the company engaged in and can
its business activity (or activities) be regarded acceptable or
unacceptable from a Sharia point of view?
• Does the company earn income from non-halal activities?
• Does the company earn interest income from its cash surpluses
or from other sources?
• Does the company borrow money on interest basis?
• What percentage of the company’s assets is in cash
(liquid) form and/or in debt form?
We will turn to the intricacies underlying the above issues in subsequent
sections; however, what was obvious to most scholars is that if
the main business of a company is not lawful from a Sharia perspective,
it is not allowed for a Muslim to purchase, hold or sell its shares,
because it will entail the direct involvement of the shareholder
in that prohibited business.
Sharia scholars are almost unanimous on the point that if a company
is engaged in lawful business or businesses and does not borrow
money on interest, or does not keep its surplus in an interest bearing
account and deals only in limited cash holdings and receivables,
then its shares can be purchased, held and sold without any hindrance
from a sharia perspective.
evidently, such companies are very rare in all contemporary stock
markets and almost all the companies quoted in the present day stock
markets are, in some way, involved in activities which tend to violate
the injunctions of Sharia. Indeed, the typical joint stock corporation
both pays and receives interest. Most companies are at least partially
capitalized with debt and, therefore, pay interest to their creditors,
who hold bonds and/or other liabilities. Companies also typically
receive interest on cash which they hold in banks or from other
market investments. A company may also charge its customers penalty
interest on any overdue accounts receivable.
In view of the foregoing circumstances relating to modern day joint
stock companies, a cross-section of Shari’ah experts in the
Muslim world is of the view that it is not allowed for a Muslim
to deal in the shares of such companies, even if its main business
is halal. Their basic argument is that every share-holder of a company
is a partner (sharik) of the company, and, according to the juristic
rules of Musharaka, every partner is an agent for the other partners
in the matters of the joint business. Therefore, the mere purchase
of a share of a company embodies an authorization from the shareholder
to the company to carry on its business in whatever manner the management
deems fit. Accordingly, if it is known to the shareholder that the
company is involved in an un-Islamic transaction, but decides to
continue holding the shares of that company, then this means that
the shareholder has authorized the management to proceed with the
un-Islamic transaction. In this case, the shareholder will not only
be responsible for giving his consent to an un-Islamic transaction,
but that transaction will also be rightfully attributed to him because
the management of the company is working under his tacit authorization.
Moreover, when a company is financed on the basis of interest, its
funds employed in the business are impure. Similarly, when the company
receives interest on its deposits an impure element is necessarily
included in its income which will be distributed to the shareholders
However, another large number of contemporary scholars do not endorse
the above conservative view and argue that a joint stock company
is basically different from a simple partnership (Musharaka). Their
opinion is that in Musharaka partnership, all policy decisions are
taken by the consensus of all the partners, and each one of them
has a veto power with regard to the policy of the business. Therefore,
all the actions of a partnership are rightfully attributed to each
partner. Conversely, the policy decisions in a joint stock company
are taken by the majority. Being composed of a large number of share-holders,
a company cannot give a veto power to each shareholder. Hence, the
opinions of individual shareholders can be overruled by a majority
each and every action taken by the company cannot be attributed
to every share-holder in his individual capacity. Scholars note
that, for instance, if a shareholder raises an objection against
a particular transaction in an Annual General Meeting, but his objection
is overruled by the majority, it will not be fair to conclude that
he has given his consent to that transaction in his individual capacity.
Therefore, if a company is engaged in a halal business, but keeps
its surplus money in an interest-bearing account where from some
amount of interest is received as income, it does not render all
the business of the company unlawful. In other words, if a person
acquires the shares of such a company with clear intention that
he will oppose this incidental transaction as much as possible and
also intends not use that proportion of dividend that may accrue
to him from this transaction, it will then be improper to conclude
that he has approved the transaction of interest and that the transaction
is attributable to him.
with regard to the company’s borrowings on interest, the scholars
argue that the above principle is equally relevant. If a shareholder
is not personally agreeable to such borrowings, but has been overruled
by the majority, such transactions cannot be attributed to him.
Moreover, even though borrowing on interest is a grave sinful act
from a Sharia perspective; the scholars, however, are of the view
that a single act (or few acts) of borrowing should not render the
whole business of the company as haram
Conditions for investing in the shares of joint stock companies
view of the foregoing discussions, a large number of contemporary
Muslim jurists have opined that dealings in the shares of joint
stock companies can be acceptable provided a host of conditions
are satisfied with regard to the relevant company before its stock
can be acquired. The following is a summary of the conditions laid
down by the scholars; however, one should keep in mind that these
conditions have been arrived at as a result of modern fiqh scholarship
(ijtihad) and represent, therefore, only the current state of juristic
thinking but not the last word on the subject.
first condition is that the main business of the company should
not violate the Shariah. In this regard business activities may
be broken down into acceptable and non acceptable as follows:
a) Acceptable Businesses
Industry sectors that don’t manufacture or market forbidden
products are generally considered halal, and are acceptable for
Muslim investors. Some classic examples of suitable industries are:
• Chemical manufacturers.
• Computers and computer software
• Agricultural production
However, even when considering such companies, it is important to
look deeply into a company’s overall business nature to discover
its core source of revenue/ or how it actually makes its money.
Simply looking at the company’s industry sector, or part of
the economy to which it belongs, may not always tell the whole story.
For example, a chemical manufacturing company may produce products
used in explosives. A publishing company might print some works
that are considered pornographic. Similarly, an agricultural producer
might sell its products exclusively to breweries.
b) Unacceptable Businesses
Companies engaged in the following business activities are considered
as haram and the shares cannot, therefore, be acquired and/or traded:
• Institutions engaged in interest-based financial products
such as conventional banks, insurance companies and companies engaged
in conventional hire purchase or factoring businesses.
• Companies that manufacture, sell or distribute liquor, narcotics
• Companies engaged in the production, manufacture, sell or
distribution of Pork and/or non-halal meat products
• Companies involved in and/or those which support gambling,
night club activities, pornography, prostitution etc
Meanwhile, a number of other businesses, such as those that harm
the environment, have poor track records with regard to labor or
developing countries, or produce and market tobacco, weapons, or
defense products have also been deemed as unacceptable by a cross-section
of Muslim scholars.
On the understanding that the business activities of the company
are confirmed as acceptable, scholars have outlined a set of criteria
for any company whose shares are to be acquired. The criteria set
by the scholars are largely of financial nature and tend to screen
the capital structure of the company and the extent to which a company
may be involved in riba (interest) dealings. In other words, these
criteria represent tolerance levels for eligibility and companies
that stay within the prescribed criteria, or screens, may be invested
in by Muslim investors while those that cross the tolerance levels
will be dropped off as not eligible for investment.
c) What is the level of income generated by a company from non-halal
Scholars use several conventions to determine the core source of
revenue for a company. In this regard they have opined that if a
company earns some income from non-Halal activities, then the proportion
of such income should not exceed 5% of the company’s total
income. If such income exceeds 5%, then it is not permissible to
invest in that company. The logic of this 5% rule is that a core
business is one that accounts for at least 95% of a company’s
gross revenue. For example, if the sale of explosives accounts for
less than 5% of a chemical manufacturer’s revenue, explosives
are not a core business and investing in that company’s stock
is generally acceptable.
What is the level of Interest Income generated by the company?
It should be noted that the tolerance level discussed herein relates
only to those companies which do not make earning interest their
core business, but place some of their surplus funds in transactions
that yield interest income. As in the previous case, ideally no
income should come from interest-related sources. However, looking
at the current situation Sharia scholars have permitted investments
in shares of companies whose income from interest forms less than
5% of a company's total income. This could be calculated as interest
income ÷ Total revenue (with a typical limit of 5%).
Thus, if upon analysis of the company’s financial information
it is discovered that the company has interest -based income of
more than 5%, then investing in the company is not allowed.
As expected, a large number of Muslims may want to question the
rationale of this 5% non-halal (impermissible) income rule; however,
the reality is that there is no specific basis derived from the
Holy Quran or Sunnah and that this is only the collective outcome
(consensus) or ijtihad of contemporary Shariah Scholars.
However, it is worth noting that even when the financials of a company
abides by this 5% limit, a purification of earnings from such companies
must be undertaken through a charity giving exercise. For example,
if 4% of the whole income of a company has come out of interest-bearing
deposits, then 4% of the dividend must be given away in charity
and must not be retained by the investor.
e) What is the level of interest bearing debt that the company
Ideally companies should not transact interest-based debt. However,
as discussed earlier, such a situation is very rare with most stock
market companies who tend to borrow for different purposes and from
different sources. Of course, the concern here for the Muslim investor
is that he will become a shareholder of a company that will be involved
in promoting Riba activities. However, according to contemporary
scholars if a shareholder is not personally agreeable to such borrowings,
but has been overruled by the majority, these borrowing transactions
cannot be attributed to him.
But even so, scholars would recommend restraint in terms of investing
in the shares of companies that indulge in heavy borrowings. Nevertheless,
the Muslim investor who is planning to become a shareholder in an
enterprise is expected to appreciate the strong prohibition leveled
by Islam against riba (interest dealings) and is required to be
concerned about enterprises that that rely on excessive interest
Accordingly, the scholars have deliberated on the level of debt
that a company may have on its balance sheet. For instance it was
noted the level of borrowings may not be limited to 5% as applied
to non-halal income. This is because, in the case of borrowings,
this activity does not affect the income of the company and it is,
therefore, less severe than interest based income. Hence, Shariah
scholars and Islamic jurists have opined that the shares of a debtor
company may be bought provided that its interest bearing debt does
not exceed 33% of its capital. This could be calculated as Total
Debt divided by Trailing 12-Month Average Market Capitalization
(where Total Debt = Short-Term Debt + Current Portion of Long-Term
Debt + Long-Term Debt).
Of course, the logic of this 33% rule as promulgated by the Sharia
scholars has been questioned but the best that can be said about
it is that it is a juristic viewpoint (ijtihad) which has been taken
as acceptable by the Muslims who would like to abide by the same.
Nevertheless, to explain the consensus of their ruling, the proponents
of this rule cite the following saying of prophet (PBUH):
The prophet PBUH advised Abu Bakr RAA not to donate more than One-Third
of his wealth, and commented that ‘’One Third is abundant
(Al Thuluthu Wathuluth Katheer)’’ (Tirmizy).
They also make reference to the following common fiqhi rule in support
of their juristic judgement:
‘’Whether a commodity that is part gold and part brass
qualifies as gold for purposes of applying the rules of riba is
resolved by the percentage of gold in the commodity, i.e., if greater
than a third, it is ‘’gold’’.
Hence, the scholars opine that whatever is less than one third,
may be regarded as not significant. This, they say, is also in accordance
with the concept of “majority” or “abundance”
as specified in the above hadith.
f) What is the level of cash and receivables (creditors) in the
company’s balance sheet?
As a general rule, the Sharia advocates for taking of ownership
stakes in real assets and not in debts or money. Hence, to be able
to acquire the shares of a company, one has to be very careful about
the level of liquid cash and receivables (creditors) in the company’s
balance sheet. This consideration is important because, according
to Islamic jurisprudence, the shares of a company can only be traded
at a premium if the company owns a comfortable level of tangible
fixed assets. If all the assets of a company are either in liquid
form, i.e. in the form of money and/or in the form of receivables
(Deyn), then such shares cannot be purchased or sold except at par
therefore, should be the exact proportion of tangible fixed assets
of a company to warrant the negotiability of its shares? Despite,
some generic differences, most contemporary scholars are of the
view that the ratio of tangible fixed assets must be 51% in the
least. They argue that if such assets are less than 50%, then the
majority of assets would be regarded to be in liquid and/or receivables
(Deyn) form, and therefore, all its assets should be treated as
liquid on the basis of the juristic principle of “The majority
deserves to be treated as the whole thing” (lii al-akthar
hukm al-kul)" .
Hence, when analyzing a company’s financials for purchase
of its shares, it is important that accounts receivables and liquid
(cash) assets should be a maximum of 50% of the company’s
total asset base (Accounts receivable and cash ÷ Total assets
(with a typical limit of 50%).
g) Matters for consideration
It is worth noting that while a company may be meeting the laid
Sharia criteria at the time of the purchase of its shares, (based
on the company’s financials), the company may, however, decide
immediately after buying the share or at a later date, to push its
borrowing levels (and pay more interest) or earn more interest (for
instance through depositing IPO monies in interest bearing accounts).
When that happens, the Sharia criteria ratios may be crossed making
the stock non-Sharia compliant. In such circumstances, the holding
needs to be disposed (sold) off immediately.
given that financial information about the company may not always
be readily available for the ordinary Muslim investor to analyze,
then the Muslim investor is put to a situation whereby he/she continues
to hold (and benefit) from an investment which is not Sharia compliant.
But even where such information may be readily available, the correct
analysis of the same on continuous basis is not an easy task for
Meanwhile, the following other issues relating to investing in shares
are worth considering:
a) Investible funds must be from a halal source. Hence, a Muslim
investor cannot borrow on interest to finance the purchase of shares.
Prohibition of speculation: unlike conventional investors Muslims
are generally discouraged from basing their investment decisions
on short-term speculation but rather as medium/long term investors.
The Sharia, through its comprehensive sources of the Quran, the
Sunna and Ijtihad shall continue to serve all the dynamic needs
of Muslims at all times. This is exemplified by the interpretational
efforts undertaken by learned Sharia scholars and jurists in coming
up with various guidelines to identify what may be regarded as permissible
stocks. However, it should be remembered that the matter under discussion
is subjected to continuous scrutiny and change by the scholars in
the light of new insights. Hence, these opinions should not, therefore,
be taken as ‘’divine’’ rules of Sharia compliance.
Nevertheless, these parameters have not been set to allow Muslims
the freedom to invest indiscriminately in the shares of listed joint
stock companies. A Muslim investor interested in buying shares of
a company is required to make every effort to measure the extent
of the company’s use of riba and avoid companies whose involvement
in the same exceeds the agreed thresholds. In addition, some scholars
recommend that Muslim investors should exercise their right as shareholders
and register their opposition to all non-Sharia compliant activities
of the company either by explicitly writing to the company or by
raising their voices at the company’s annual meetings.