Category: Business Matters
Fatwa#: 38427
Asked Country: United Kingdom

Answered Date: May 31,2017

Title: Purchasing Shares

Question

Assalaam wa alykum

 

I would like to know if moulana can please advice me with regards to  the following shares....if permisible or not.

 

reason being - I have been gifted these shares...and am not sure if i should sell some and give money away...or

 

BRITISH TOBACCO (BTI)

MEDICLINIC (MEI)

MR PRICE (MRP)

NASPERS LTD (NPN)

MTN

FIRSTRAND LTD (FSR)

STANDARD BANK GROUP (SBK)

GROWTHPOINT PROP LTD (GRT)

REDEFINE PROPERTIES LTD (RDF) 

BRAIT S.A (BAT)

INVESTEC PLC (INP)

RAND MERCHANT INV HLDGS (RMI)

GRINDROD LTD (GNDP)

STEINHOFF INVEST (SHFF)

NEW GOLD PLATINUM (NGPLT)

 

I would really appreciate moulanas advice....

Answer

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

In principle, if the core business of a company is providing financial services like loans on interest etc., then it is not permissible to purchase shares in such a company.

If the core business of the company is in Shariah compliant avenues like manufacturing vehicles, machines or fabric, then it is permissible to purchase shares in such a company. If such a company earns interest through deposits, that percentage of the shareholder should be given in charity.

You may refer to the footnotes for a more detailed explanation on the issue.

And Allah Ta’āla Knows Best

Huzaifah Deedat

Student Darul Iftaa
Lusaka, Zambia 

Checked and Approved by,
Mufti Ebrahim Desai.

_________________

Introduction to Islamic Finance- Mufti Taqi D.B- Page 207  

 

Dealing in equity shares can be acceptable in Shari‘ah subject to the following conditions:

1. The main business of the company is not violative of Shari‘ah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shari‘ah, such as companies manufacturing, selling or offering liquors, pork, harâm meat, or involved in gambling, night club activities, pornography etc.

 2. If the main business of the companies is halâl, like automobiles, textile, etc. but they deposit their surplus amounts in an interest-bearing account or borrow money on interest, the shareholder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

 3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given in charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

4. The shares of a company are negotiable only if the company owns some illiquid assets. If all the assets of a company are in liquid form, i.e. in the form of money they cannot be purchased or sold except at par value, because in this case the share represents money only and the money cannot be traded in except at par.

What should be the exact proportion of illiquid assets of a company for warranting the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of illiquid assets must be 51% in the least. They argue that if such assets are less than 50%, then most of the assets are in liquid form, and therefore, all its assets should be treated as liquid on the basis of the juristic principle: لللأكثر حكم الكل  .

The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the illiquid asset of a company are 33%, its shares can be treated as negotiable. The third view is based on the Hanafi jurisprudence. The principle of the Hanafi school is that whenever an asset is a combination of liquid and illiquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions: Firstly, the illiquid part of the combination must not be in ignore-able quantity. It means that it should be in a considerable proportion. Secondly, the price of the combination should be more than the value of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets, the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the balance of 30 dollars is in exchange of the fixed assets. Conversely, if the price of that share is fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75.

 This kind of exchange falls within the definition of ‘riba’ and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars of the price are against 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for being the price of 75 dollars. For this reason the transaction will not be valid. However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where the price of a share goes lower than its liquid assets. Subject to these conditions, the purchase and sale of shares is permissible in Shari‘ah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shari‘ah as partners inter se.

All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits are earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as ‘purification’. The Shari‘ah scholars have different views about whether the ‘purification’ is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains, the process of ‘purification’ is necessary, because the market price of the share may reflect an element of interest included in the assets of the company.

The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of the price can be allocated for the interest received by the company. It is obvious that if all the above requirements of the halâl shares are observed, then most of the assets of the company are halâl, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also ignore-able as compared to bulk of the assets of the company. Therefore, the price of the share, in fact, is against bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halâl assets only.

 Although this second view is not without force, yet the first view is more precautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund, because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price as compared to the first person. On the contrary, if purification is carried out both on dividends and on capital gains, all the unit-holders will be treated at par with regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit holders to carry out purification in the capital gains also. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.

The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudâribs for the subscribers. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing. The share of the management will increase with the increase of profits. The second option for the management is to act as an agent for the subscribers. In this case, the management may be given a preagreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shari‘ah scholars, the fee can also be based on a percentage of the net asset value of the fund.

 For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund 11 at the end of every financial year. However, it is necessary in Shari‘ah to determine any one of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund the basis on which the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon by all the subscribers. 

 

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