Stock Market Permissible ?

In the name of Allah, Most Compassionate, Most Merciful, As mentioned in an earlier post, investing in the stock market and buying shares of a particular company is permissible, according to the majority of contemporary scholars, provided four conditions are met:

1) The main business of the company is lawful,

2) The company must have some liquid assets in its possession,

3) One raises his objection to the company’s interest-based transactions,

4) The proportion of the company’s income gained through interest-based dealings is given in charity.

As far as all the partners having physical contact and knowing one another, that is not necessary. It is not necessary Islamically that all the partners of a business know one another, remain in contact or have direct influence in the running of the business.

When one purchases the shares of a company, one will be considered a partner and share-holder of the business, hence all the rules of partnership (shirka) will apply.

In partnership, if all the partners agree to work together, then each one will be treated as an agent of the other in all matters of the business, and any work done by one of them in the normal course of business shall be deemed to be authorized by all of them.

However, if they agree that some partners will manage the business whilst the others will be considered to be sleeping partners, then that is also permissible. (See for details: Islamic finance, P. 42-43)

As far as the moral aspect (towards which you have pointed out) is concerned, that is another matter altogether. This would depend on the company of which one is being a partner, and the whole idea of the evils connected to the stock market trading. Thus, if one was to avoid investing in the stock market due this, it would certainly be a commendable act.

And Allah knows best

Shariah Screening Criteria

Shariah compliance of stocks is done under the guidance of qualified and reputed Shariah experts. For stocks to be “Shariah compliant”, it must meet ALL the six key tests given below:

    1. Business of the Investee Company
      The core business of the company should not violate any principle of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest like conventional banks, insurance companies, leasing companies or the companies involved in some other business not approved by the Shariah e.g. Companies making or selling liquor, pork, haram meat, or involved in gambling, or any other impermissible activities.If the main business of the investee companies is Halal, like automobiles, textiles, manufacturing concerns etc but they deposit their surplus amounts in an interest bearing account or borrow money on interest, the share holder must express his/her disapproval against such dealings, preferably by raising his/her voice against such activities in the annual general meeting of the company and/or by sending a letter to the management in this regard.
    1. Interest Bearing Debt to Total Assets, <37%
      The Interest Bearing Debt to Assets ratio should be less than 37%. To understand the rationale behind this condition, it should be kept in mind that such companies are mostly based on interest. Here again, the aforementioned principle applies i.e. if the shareholder is not personally agreeable to such borrowings, but has been overruled by the majority, these borrowing transactions cannot be attributed to him/her. Debt, in this case, is classified as any interest bearing debt including Bonds, TFCs, Commercial Paper, Conventional Bank Loans, Finance Lease, Hire Purchase, issuing preference shares etc.
    1. Non-Compliant Investments to Total Assets, <33%
      The ratio of Non Compliant Investments to Total Assets should be less than 33%. Non-Shariah Compliant Investments include investments in conventional mutual funds, conventional money market instruments, Commercial Paper, interest bearing bank deposits, Bonds, PIBs, FIB, T-Bills, CoIs, CoDs, TFCs, DSCs, NSS, derivatives etc. Non-Compliant investments also include investments in companies which are declared Shariah non-Compliant due to non-compliance to any of the mentioned criteria for Shariah Compliance.
    1. Non-complaint Income to Total revenue, <5%
      The ratio of Non Compliant Income to Total Revenue should be less than 5%. Total Revenue includes Gross Revenue plus any other income earned by the company. Non Compliant Income includes income from gambling, income from interest based transactions, income from Gharar based transactions i.e. derivatives, insurance claim reimbursement from a conventional insurance company, any penalty charged on late payment in credit sale, income from casinos, addictive drugs, alcohol, dividend income from above mentioned businesses or companies which have been declared Shariah Non-Compliant due to non-compliance to any of the mentioned criteria for Shariah Compliance etc.
    1. Illiquid Assets to Total Assets, >25%
      The ratio of Illiquid Assets to Total Assets should be at least 25%. The Sum of all those assets whose trade price can deviate from par value, according to the rules of Shariah, is considered the aggregate value of illiquid assets. Illiquid Assets include inventory of raw materials, work-in-process, all fixed assets such as property, plant & equipment, stores and spares, stock in trade etc.
  1. Net Liquid Assets/Share vs Market Price/Share
    Market Price per share should be at least equal to or greater than net liquid assets per share. Net liquid assets per share is calculated by using the following formula:

KSE recomposes Shariah-compliant stock index

According to a notice on the KSE website, the five new companies in KMI-30 are Fauji Cement, Attock Petroleum, Sui Northern Gas Pipelines, Pakgen Power and NetSol Technologies. The outgoing five are Attock Cement, Abbott Laboratories, Pak Suzuki, ICI Pakistan and Indus Motor Company.

Out of the KSE-100 Index, KSE All-Share Index, KSE-30 Index, KMI-30, BK TI and OG TI, only KMI-30 tracks the performance of Shariah-compliant stocks based on the free-float market capitalisation methodology.

The KSE management has recomposed the index based on a review period of January 1 to June 30. The index is revised on a semi-annual basis.

The screened list of Shariah-compliant securities is provided by Al Meezan Investment Management Limited, an asset management company, whose research analysts review each company’s financial reports frequently to ensure that they meet all the relevant benchmarks.

Despite repeated attempts, no one from the KSE or Al Meezan Investment Management was available for comments on the reasons for the removal of the five companies from KMI-30.

For any stock to be Shariah compliant, it must meet six broad criteria. First and foremost, the core business of the company should not violate any principles of Shariah. Also, interest-bearing debt in relation to total assets of the company must be less than 37% for it to be called Shariah compliant.

Non-compliant investments in relation to total assets must be less than 33%. Similarly, non-compliant income in relation to total revenue must be less than 5%, illiquid assets in relation to total assets must be greater than 5% and the market price per share should be equal to or greater than net liquid assets per share for a company to become Shariah compliant.

Published in The Express Tribune, December 17th, 2013.