Dealing
in equity shares can be acceptable in Shariah subject to the following conditions:
The main business of the company is not in violation of Shariah.
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
Shariah, such as the companies manufacturing, selling or offering liquors,
pork, haram meat, or involved in gambling, night club activities, pornography
etc.
If the main business of the companies is halal, like automobiles,
textile, etc. but they deposit there surplus amounts in a interest-bearing
account or borrow money on interest, the share holder must express his
disapproval against such dealings, preferably by raising his voice against such
activities in the annual general meeting of the company.
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 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.
The shares of a company are negotiable only if the company owns
some non-liquid assets. If all the assets of a company are in liquid form, i.e.
in the form of money that cannot be purchased or sold, except on 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 non-liquid assets of a
company for the negotiability of its shares? The contemporary scholars have
different views about this question. Some scholars are of the view that the
ratio of non-liquid assets must be 51% at the least. They argue that if such
assets are less than 50%, the most of the assets are in liquid form, therefore,
all its assets should be treated as liquid on the basis of the juristic
principle: The majority deserves to be treated as the whole of a thing. Some
other scholars have opined that even if the non-liquid asset of a company or
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 mixture of liquid and
non-liquid assets, it can be negotiable irrespective of the proportion of its
liquid part. However, this principle is subject to two conditions:
First, the non-liquid part of the mixture must not be in a
negligible quantity. It means that it should be in a considerable proportion.
Second, the price of the mixture should be more than the price 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 rest
of 30 dollars are in exchange of the fixed asset. Conversely, if the price of
that share 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 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 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 a price of
the share goes lower than its liquid assets.
Subject to these conditions, the purchase and sale of shares is
permissible in Shariah. An Islamic Equity Fund can be established on this
basis. The subscribers to the Fund will be treated in Shariah 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 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 Shariah 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 price
can be allocated for the interest received by the company. It is obvious if all
the above requirements of the halal shares are observed, the most of the assets
of the company are halal, 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 a negligible as compared to the bulk of the assets of the
company. Therefore, the price of the share, in fact, is against the 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 halal assets only.
Although, the second view is not without force, yet the first view
is more cautious 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 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 compared to the first person.
On the contrary, if purification is carried out both on dividend
and capital gains, all the unit-holders will be treated at par with the 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. 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 mudaribs for the subscriber. 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, but the share of the
management will increase with the increase of profits.
The second option of the management is to act as an agent for the
subscribers. In this case, the management may be given a pre agreed fee for its
services. This fee may be fixed in lump sum or as a monthly or annual
remuneration. According to the contemporary Shariah 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 at the end of every financial year.
However, it is necessary in Shariah to determine any 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 on what basis 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 on all the
subscribers.
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