In this article I grapple with a very controversial topic: are Muslims allowed to trade in stocks even if it earns impermissible income (for instance, interest from a bank)?
Understandably, this makes practising Muslims feel very uncomfortable - and rightly so. After all, if we cannot receive interest from a bank in an individual capacity, why should we be allowed to receive interest via our investments?
The first thing to note is that there is a difference of opinion on this matter. Some scholars opine that it is haram to invest in a company if it is involved in impermissible income…just like how it is haram to receive an impermissible income in an individual capacity.
Other scholars say it is not as simple as that. I outline some of the arguments for this stance below.
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.
1. Absence of a completely Islamic finance system
Unfortunately, there is an absence of a completely Islamic banking system in the world. In fact, many supposed Muslim countries have banks that operate using interest. Further, as the world becomes increasingly globalised, Western banks – and their interest-based business model(s) - are gaining a presence in Muslim countries.
Thus, almost every company is exposed to some usury - either receiving or paying it. And if companies are exposed to interest, then so are their shareholders.
To be clear, no scholar is saying it’s okay to receive interest-income and benefit from it. No. What some scholars are saying is that if any interest-income is earned then it has to be given away without any expectation of reward. Significantly, though, some scholars say that if a company is involved in small amounts of interest-earning, then it may not make it impermissible to invest in such a company.
2. Incidental v intentional
If you’ve read anything written by Mufti Taqi Usmani, you’ll know the man is a master of expressing complex ideas succinctly. In this spirit, he expertly makes the distinction between impermissible income being “incidental” versus “intentional”.
If a company’s business model is based on generating income from impermissible income, then that is clearly “intentional” and therefore haram – even if it’s only 1% (or even less).
This should not come as a surprise. After all, the very first hadith in Bukhari is on intention:
I heard Allah's Messenger (ﷺ) saying, "The reward of deeds depends upon the intentions and every person will get the reward according to what he has intended. So whoever emigrated for worldly benefits or for a woman to marry, his emigration was for what he emigrated for."
Intentional
In some cases, a business may offer a product (for instance, alcohol) or a service (for instance, gambling facilities). There is nothing incidental about that. That is clearly intentional and therefore clearly haram as it blatantly goes against the shariah. There is no difference of opinion on this matter.
Incidental
As mentioned in point one above, it is often impossible to avoid an interest-based banking system, and therefore the occurrence of receiving unwelcome, unintended interest is sadly a reality – both for individuals and businesses.
An example may help. Let us assume the transport company ‘National Express’ sold 20% of its coach fleet to upgrade to newer vehicles to meet customer expectations. Obviously, the buyer of the coaches would not pay in cash notes and coins. The payment would be transferred from the buyer’s bank account to a bank account belonging to National Express. Now suppose it took National Express 10 months longer than expected – perhaps due to a national lockdown – to source and buy replacement coaches. For those 10 months, it may very well receive interest on the money sitting in its bank account from the sale of the coaches.
The question here would be ‘did National Express intend to earn interest-income’, or was it incidental?
For a moment, let us entertain the idea of it not being incidental. The sale of a fleet of coaches would go into the millions. Would a business hold millions of pounds in cash in the manager’s office from the sale of the coaches? Would the buyer be willing to withdraw millions of pounds from its bank to then pay National Express in notes and coins? (Both of these scenarios would avoid earning interest-income). What if it was an international buyer that relies on a letter of credit to make the purchase (and therefore only bank transfer is viable)?
From these questions alone, it becomes clear that the money would need to be held in a bank account. It also becomes clear that the possibility of receiving interest money arises. Further, a national lockdown is out of National Express’s control.
So in such a case, how could it be argued that National Express intended to earn impermissible interest-income? The sensible conclusion would be to say the interest-income is incidental (which has to be given away to charity without expectation of reward).
3. Accountability, decision-making and objections
Another dimension to this discussion revolves around decision making. Every scholar issues a fatwa based on the reality of a matter. And scholars often understand the reality of a matter in different ways giving rise to a difference of opinion.
In a one-owner business, clearly the owner makes all the decisions and is accountable for all the decisions. In the case of a partnership, as long as there aren’t too many partners, every partner is able to influence, and perhaps veto, certain decisions.
But what if there are thousands or even millions of partners in a business (as in the case of a publicly listed business)?
Is a small shareholder accountable for the decisions of a CEO? Some ulama seem to think so, and those same ulama hold the view that as a shareholder, you’re a partner in a business and therefore accountable for its decisions. Sadly, these ulama have not understood the reality of being a shareholder. In a large PLC (public limited company), shareholders do not have any real say in the day-to-day decision making process. They do, however, get the right to vote for certain things at the AGM (for instance, on the CEO remuneration), but even then it’s possible that the small shareholders get outvoted by the majority.
Despite this reality, is it reasonable to say the small shareholder is accountable for the actions of the CEO?
Nonetheless, both Mufti Taqi Usmani and Mufti Adam (Leicester) say that it is necessary to raise objections to problematic decisions wherever possible as a matter of duty.
4. 5% impermissible income allowed?
And now we reach the topic of the 5% impermissible income allowance.
There are Muslims who have a very simplistic understanding of Islam. Perhaps these same Muslims understand Islam as a ritualistic religion that comes with a fixed set of rules. If that were the case, Islam would have died a long time ago. Instead, it is the fastest growing religion in the world, and that would not happen if it was stuck in time 1,400 years ago.
The Quran and hadith guide Muslims via a set of principles (for example, equity, mercy, etc.) as well as fixed rules. In fact, the said principles has allowed us to derive guidance over a millennium later. Had the Quran provided only a fixed set of rules applicable to the desert Arabs only, then many would consider the Quran inapplicable to modern day life.
The truth is, there is no 5% allowance mentioned in the Quran for impermissible income. So where did it come from?
First, it should be understood that the 5% rule is really a tolerance rather than an allowance. The word allowance implies it’s okay to receive impermissible income. To give an analogy, a teacher may tolerate three instances of misbehaviour before a student is asked to leave the class on the fourth instance of misbehaviour. It doesn’t make the misbehaviour okay, but three or fewer instances of misbehaviour is not significant enough to kick out the student.
I mentioned above that the principles set out by the Quran and Sunnah allow us to derive guidance. Whilst this is fine for the ulama, it becomes difficult to apply in our everyday lives for the lay Muslim. If we take the fiqhi principle ‘the majority deserves to be treated as the whole’, then a logical following question would be ‘how are ordinary Muslims supposed to apply that to their everyday lives?’. It’s not straightforward.
This is why sometimes the ulama provide us with a guideline. This makes it easier to follow Islamic principles and also ensures we follow a standardised rule. In this case, 5% has been chosen as a threshold, arbitrarily, because it’s a small, insignificant amount. It’s not large enough to make a material difference to the overall earnings and it's certianly not excessive.
It should also be understood in the context of the reality which we live in. I have explained above that it’s often impossible to escape an interest-based banking system, so the possibility of receiving interest from the bank is very real. However, if it were possible to totally avoid this type of impermissible income, then of course there would be no 5% rule. The reality we live in is less than ideal, but rules such as the 5% rule or the 1/3 rule are there to help Muslims navigate the complex world of investing. Also, following this threshold means we take out our individual desire out of the equation.
If you’d like to learn more about how to research companies and look for things like impermissible income, 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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