Shariah Perspective on Securities
2.2 Restriction on Investment
2.1 Introduction
Permissibility of Trading in Securities
1. Trading in securities comes under the general
ruling on trade: Holy Quran, 2:275 : “ Allah has
permitted trade…”
2. Trustees are urged to invest the fund in a
business that may yield profits. Hadith of
Amrubin Shuaib that the Messenger of Allah
said: “Whoever is entrusted with the money of
an orphan should trade with it and should not
leave it sitting to be used up by zakat.” (Tirmizi)
3. Initial ruling of everything: permissible until a
ruling on its prohibition comes thereafter.
Factors of permissibility
1. Is the nature of business of the company
nonhalal?
2. Does the company earn income from non-halal
activities?
3. Does the company earn interest (riba) income
from its savings, debtors or investment?
4. Does it borrow money on interest?
If all the answers negative = permissible
How to determine the nature of company’s business?
 Must not contravene Shariah!
 Example: Manufacturing / marketing / selling of
halal goods.
 Not involving in liqour, non-halalmeats, drugs,
gambling, pornographic materials, prostitution,
etc.
Free from riba
Free from gharar
Free from other
Shari'ah prohibitions
Free from unlawful
market practices
1. Free from riba
 Riba = surplus/addition in a loan or a
contract of exchange of ribawi items.
 Holy Quran, 2:275 : “Allah has permitted
trade and has prohibited riba”
 Riba cause injustice
 Cannot pay & receive riba/interest - which is
the common practice of getting fund among
companies
2. Free from gharar
 Literal meaning: 1)hazard, 2)deceit,
3)exposure to destruction.
 Related to ignorance or uncertainty or fraud
or concealment of price, subject matter,
terms of contract
 Likened to gambling = forbidden
 2:219: They ask thee concerning wine and
gambling. Say: “In them is great sin, and
some profit, for men; but the sin is greater
than the profit
 Hadith reported by Abu Hurairah that
Prophet Muhammad PBUH forbade a
transaction determined by throwing stones,
and the type which involve some
uncertainty.
3. Free from other Shari’ah prohibitions
 Gambling (Maysir -- 2:219 and 5:90)
 Liquor (Khamr - 5:90)
 Prostitution (prohibition on zina/adultery/fornication : 25:6-
69&24;2)
 Pornographic materials: (“Do not even come near to zina…”
17:32)
 Non-halal meats (6:145)
 Drugs (Hadith: “Every intoxicant is Khamr, and every Khamris
haram.” Reported by Muslim.)
 Tobacco (self destruction 2:195; and wasteful act 17:26-27)
 Pubs & night clubs (leading to khamr, zina& immoral acts)
4. Free from unlawful market practices
 Short selling = forbidden.
 Hadith : ‘Do not sell what you do not have
(own).’
 Art 205 of the Mejelle: The sale of a non-
existing thing is invalid (Batil)
5. Other consideration
 Purpose of trade / investment: not for
speculative purposes – for own use not to
increase price.
 Investment fund must come from a halal
source.
2.3 Nature of
permissible portfolios
Commodities
Equities
1. Commodities:
generate profits by buying and reselling lawful /
halal commodities.
This fund normally uses two types of Shariah
approved contracts:
a. Bay‘ al-Salam (future delivery)
b. Istisna‘(manufactured item)
2. Equities:
Funds are used to purchase common shares in
companies engaged in halal business which does
not contravene the Shariah – must comply with
Shariah compliant accounting principles.
Mudharabah (profit sharing) Musyarakah (partnership)
2.4 Commonly used
Islamic Contracts
Murabaha Ijarah
1. Mudharabah
a. Contract b/w mudharib (Provider of
funds) and the entrepreneur.
b. Funds are used for investment in a
business project by an entrepreneur.
c. Profits are distributed based on pre-
agreed profit sharing ratio.
d. Loss are solely borne by the mudharib
except when the entrepreneur was
negligent
2. Musyarakah
a. partnership or joint venture for a specific
business.
b. Funds by all partners are utilized for the
said business.
c. Profits of the business will be distributed
among partners according to the agreed
ratio.
d. Share the losses based on their equity
participation.
3. Murabaha
a. Funds are used to buy goods (movable
and immovable properties) and resell
them to a third party at a given price.
b. Usually known as ‘cost-plus’ financing
c. The price is made of the cost of goods
plus a profit margin. The cost and margin
must be agreed in advance.
4. Ijarah
a. to acquire and keep ownership of an
asset (real estate, machinery, vehicles or
equipment) - makes profits by leasing it
out in return of a rental payment.
b. The fund manager is responsible for the
management of the asset – will receive a
management fee.
c. The leased item must be used in a
shariah compliant manner.
2.5 SC criteria on permissible securities

The screening will be done by the SAC, from annual  20%: applicable to the following
financial reports, survey forms and inquiries to the businesses/activities:
company’s management. There will be periodic 1. hotel and resort operation;
2. share trading;
monitoring on all listed companies. The securities are 3. stock broking business;
subject to certain conditions, to become certified as 4. rental received from non-compliant activities;
5. other activities deemed non-shariah compliants
Shariah compliant securities. Thus, a company must fulfil
certain criteria / conditions.
2. Financial ratio benchmarks

o Ratio i) Cash over total assets

The SAC adopts a
two-tier quantitative Cash only includes cash placed in conventional
approach: accounts and instruments, whereas cash placed
in Islamic accounts and instruments is excluded
1.business activity 1.financial ratio
1.(not included in from the calculation.
the two-tier)
benchmarks benchmarks
2.Additional Criteria
o Ratio ii) Debt over total assets
Debt only includes interest-bearing debt
1.Ratio (i): Cash over
5%
total assets
1.Qualitative aspect whereas Islamic financing or sukuk is excluded
from the calculation.

1.Ratio (ii): Debt 1.1. Public REMEMBER! Each ratio, which is intended to
20%
over total assets Perception measure riba and riba-based elements within a
company’s statements of financial position,
must be less than 33 per cent
1.2. Image of the
company's activities

*Any securities are Shariah-compliant if they are within

the two benchmarks SPECIAL PURPOSE ACQUISITION COMPANY
(SPCA)
1. Business activity benchmarks:
The contribution of non-Shariah compliant  Special company formed to acquire
activities - computed and compared against the businesses through acquisition or merger
overall revenue and profit before taxation of a with other entities.
company.
 5%: applicable to the following  A publicly-traded shell company - raises
businesses/activities: funds through an initial public offering.
1. conventional banking;
2. conventional insurance;
3. gambling;  The proceeds are placed with a trustee
4. liquor and liquor-related activities; pending a qualifying acquisition.
5. pork and pork-related activities;
6. non-halal food and beverages;
7. non-Shariah compliant entertainment;  To be Shariah-compliant = must meet
8. interest income from conventional accounts
and instruments
following criteria:
9. dividends from investment in non-Shariah
compliant o The proposed business activity must be Shariah-
10. instruments, interest income awarded compliant;
arising from a court o The entire proceeds raised from the IPO must be
11. judgment or arbitrator); placed in an Islamic account
12. tobacco and tobacco-related activities; and o If the proceeds are invested, the investment must
13. other activities deemed non-compliant be Shariah-compliant.
according to Shariah.
2.7 Disposal of Shariah non-compliant securities

SAC advises holders of Shariah non-compliant securities

to dispose of those securities.

How? Depending on the types:

1. Securities which were Shariah compliant but are

reclassified as non-compliant
2. Securities which are non-Shariah compliant

2.8 Conclusion

 Shariah permits trading / investment in Shariah

compliant securities only.
 In Malaysia, there are criteria to determine
whether a security is Shariah compliant or
otherwise
 Almost 75% of securities traded on MSE are
Shariah compliant
 Monitoring by the SAC on the list is periodic to
ensure authenticity.