The rise of trading platforms aimed at retail investors has encouraged ordinary investors to participate in the stock market. Unsurprisingly, many of those participants are Muslims.
From food to clothing and many other things besides, Muslims need to follow rules set out by the shariah. And when it comes to the stock markets, it’s no different. There are some Muslim investors that simply seek out stocks that sells a halal product or service. In the opinion of these investors, such a check makes the stock entirely shariah complaint. This is incorrect. Sadly, this opinion arises out of a lack of knowledge and understanding. The Qur’an advises:
“And ask the people of knowledge when you do not know.” [Qur’an 16:43]
Nowadays, there are so many Islamic Finance experts in the world who can be reached fairly easily so there’s no reason to attempt to be DIY scholar.
Making sure a company offers a halal product or service is certainly a factor in determining if a stock is halal, but it’s not the only factor. There are several other factor that needs to be looked into.
This article will look at one of those factors: the level of interest-bearing debt.
You may have come across the term ‘debt:equity’, ‘debt:market cap’ or ‘debt:assets’. All of these things are trying to understand one thing: how much debt does a company have relative to its value. The issue of value itself is not straightforward because people value companies in different ways.
Whatever term you might have come across, they are all trying to determine whether a company has excessive interest-bearing debt.
This may sound like a difficult thing to understand, but it’s not. Let’s break this down to make sense of it all.
What is ‘debt’ and why is it an issue?
If you were to borrow money from a friend then it could be said you owe a ‘debt’. So debt simply refers to borrowing money. Just like an individual, a business can also borrow money. However, whereas your friend will lend you the money without charging interest, it’s very unlikely a company can borrow money interest-free in the Western world. And herein lies the issue.
This is potentially very problematic and raises some questions. For example:
As individuals, if we are not allowed to engage in transactions that involve interest, are we allowed to invest in companies that engage in transactions that involve interest?
If you invest in a company that is free of debt, but then it takes on interest-based debt, would you become sinful?
If you voice your objections to a company taking on interest-based debt, but the management still take on interest-based debt, are you accountable for that transaction as a shareholder?
There are many issues in Islam that scholars have interpreted in different ways, and as a result, have come to different conclusions about (called ikhtilaf).
The issue of interest-based debt is one of those issues of ikhtilaf.
Just to be clear, the MuslimShareTrader website does not issue fatwas. Any semblance of a fatwa is purely coincidental. Our intention is to merely present what scholars have said on certain matters. We strongly encourage you to seek out your own religious advice from a qualified ‘aalim.
What does the Qur’an and hadith say about investing into a company that engages in interest-bearing loans?
Nothing. The Qur’an and hadith books don’t directly mention investing on the stock markets. This should not come as a surprise because the Quran was revealed a thousand or so years before the advent of the stock market.
Therefore, scholars had the difficult task of providing guidance to people in the matter of investing with very little to work with.
In situations like this where there are no direct Qur’anic verses or hadiths to work with, scholars may use other sources and methods to provide guidance.
What have scholars concluded on this matter?
As mentioned above, there’s ikhtilaf on this issue – and we’re not talking about small nuances either.
Some scholars have opined that investing into a company that engages in interest-bearing loans is impermissible.
Other scholars, meanwhile, have said it is permissible to invest in companies even if it engages in interest-bearing loans as long as certain shariah rules are followed.
How comes some scholars have allowed investing into companies that engage in interest-based transactions?
To understand why some scholars say it’s permissible, it’s necessary to understand the context under which the scholars provided their religious opinions.
There was a time when stocks were only traded by large organisations. Indeed, in 1952, only 4.2% of the U.S. population owned stocks. Of that figure, Muslim would have accounted for close to 0%. In other words, the stock market was not something that scholars paid much attention to (there were more pressing concerns for the ummah).
However, during the dot com boom era (around the year 2000), there was a lot of interest around stocks, both from Muslims and non-Muslims. Many people viewed it as a good investment, and perhaps some saw it as a ticket to riches.
This led to scholars getting a lot of queries on matters that they previously did not pay any real attention to. Whilst there were plenty of scholars around in both the western and the Islamic world, they were not necessarily well versed in the financial markets and therefore access to appropriately trained ulama was not easy. At the time, experts such as Mufti Muhammad Taqi Usmani (Pakistan), Shaykh Saleh Tug (Turkey) and Shaykh Mohammad Al Tayyeb Al Najar (Egypt) were few and far between.
Many Muslims wanted to participate in the stock market and sought fatwas relating to individual stocks. Understandably, the small number of scholars that were experts in this field could not viably service the religious needs of the growing number of enquirers and provide individual fatwas on stocks (indeed, there are tens of thousands of companies one can buy shares in!).
Shaykh Nizam Yaqubi offered a solution to this problem in 1998. He issued a general criteria for buying stocks that took into account shariah principles. Before this, the only options were to find a scholar knowledgeable in this field (which was rare at the time) or go with gut instinct (which is no different to what a non-Muslim might do). By far, Shaykh Nizam’s solution was the best option at the time.
Since then, a number of shariah scholars have adopted variations of the Shariah screening criteria. In fact, many of these scholars sit on shariah boards at various financial institutions now.
I mentioned above that some scholars concluded that it would not be haram to invest in a company that deals with some interest. This has caused discomfort to some Muslims (and has possibly led to some loss of trust in scholars); after all, isn’t interest impermissible in Islam?
A short discussion on this might be useful.
We need to bear in mind that at the time there was an absence of an interest-free financial system- and this is still the case today. Nowadays there are, at least, some specific financial products that are interest-free (such as a Home Purchase Plans) in the western world, but even then, many Muslims view this with suspicion and claim it’s a proxy for profiteering by pseudo Islamic banks. Certainly, shariah compliant financing in the nineties would have been very difficult, if even possible, to access for Western companies.
Further, the management of companies trading on the stock market would not have abided by Shariah principles. After all, they were almost exclusively non-Muslims.
The scholars had to form a religious opinion (fatwa) based on the context at the time and so they asked themselves this question:
What level of exposure can be overlooked and considered as the maximum allowance for exposure to riba in investments?
The answer they came up with may surprise you: some scholars said a company may have 1/3 exposure to interest bearing debt. Whether you agree with this figure or not, at the very least Muslims now had clear parameters to work with.
Some other scholars, meanwhile said an exposure as high as 49% debt could be considered permissible!
The next section looks at how this figure was reached
Why was 1/3 set as the permissible limit?
Mufti Faraz Adam explains “scholars searched for an indicator in the Shariah to differentiate between excessive and minor exposure in scenarios where exposure is beyond one’s control and power. Some proposed 49% as that is the final number to remain a ‘minority’ based on the Islamic legal maxim that the ‘excessive is given the ruling of the whole’.
However, a figure of 49% would not have sat well many most people, both scholars and non-scholars. In any case, because the focus was on determining what might be considered “excessive”, there was a hadith which directly alluded to the idea of ‘excess’. Granted, it was not in the context of the stock market, but it was in a financial context.
The narration is as follows:
Sa’d said: “I was stricken by an ailment that led me to the verge of death. The Prophet came to pay me a visit. I said, ‘O Allah’s Apostle! I have much property and no heir except my single daughter. Shall I give two-thirds of my property in charity?’ He said, ‘No.’ I said, ‘Half of it?’ He said, ‘No.’ I said, ‘One-third of it?’ He said, ‘You may do so, though one-third is also excessive.” [Bukhari]
So, the above hadith confirms that anything above 1/3 is excessive. This provided a shariah basis to determine what could be considered excessive, and so this figure came to be the dominant benchmark.
You may have noticed that when debt:equity (or other similar ,easurement) is mentioned, it’s normally expressed as a percentage. So, it should be 33%, really. However many scholars say we should adopt the figure of 30% instead. This is simply to build in some buffer, whilst being close to the 1/3 mentioned in the hadith.
Mufti Faraz Adam further explains:
“The Maliki school adopts one-third in several issues as a benchmark. Imam al-Qarafi lists nine other areas of Fiqh which considers one-third as a benchmark, including rulings in matters of blood money, exempting one-third when selling an unknown amount of foodstuff, tolerating deficiencies in a sale-item when it is less than one-third, wiping of one-third of the head in Wudhu, allowing the pricing up to one-third when sale items are priced exuberantly and other such issues. Thus, one-third has manifested in other areas of jurisprudence as a measure and benchmark to allude to excessiveness and completeness.”
Final thoughts
There may still be many Muslim investors who feel uncomfortable with investing in a company that engages in riba. Trying to stay away from instances of riba is certainly commendable, though sadly in the Western world this may not always be possible.
In the context of the stock markets, there are plenty of companies that are debt-free. Granted, you won’t find too many of them in a single country, but if you’re open to investing in a few different countries, it’s certainly possible to assemble a portfolio of stocks that are free of interest-bearing debt.
If you’d like to learn more about how to research companies and look for things like debt, consider joining my free 30 Day Trading Programme. In it, you’ll learn about Islamic Principles of Investing, Basics of the Stock Market and Trading Online (using a trading platform).
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