Dr. Shariq Nisar
Shariah compliant stocks are those stocks that comply with shariah screening norms. Under the shariah, ‘shares’ of a company are defined as undivided ownership of an asset. Thus it is permitted to buy ownership.
However, a Muslim has to ensure that the business of which he is an owner (though very minor) is not engaged into un-Islamic or unethical activities. To ensure this compliance, there is business screening.
Further to this, there are some financial screens. These screens ensure that it is not only the business that has to be compliant with shariah, but also the financial structuring and trading practices of the company. For example, a company is engaged in trading, which is permitted, but at the same time it borrows heavily from the market. A company may also have suspect income from various other sources like alcohol, gambling, vulgar entertainment etc.
To put a check on all these kinds of suspect income, shariah scholars have devised certain norms of screening which are called shariah screening norms. The norms which are normally practiced are as follows:
All businesses related to conventional financial services are prohibited, thus screened out. Consequently banks, financial companies, insurance operators and stock broking firms etc fall under this category. Other businesses which are not fully compliant with Islamic ethos like hotels, where alcohol and pork is served; activities associated with film’s production and distribution and also the media which is filled with vulgar entertainment and sugar factories where molasses generated in the processes are used for producing potable alcohol. Businesses of tobacco, gambling and lottery are also excluded from the list of permitted activities.
After the business compliance, selected companies were subjected to following financial screens.
Borrowing: Should be less than 1/3rd of the Trailing Twelve Month Average Market Cap (TTMAMC).
Receivables: Should be less than 1/3rd of the TTMAMC.
Interest income: Should be less than 5 per cent of the total income of the company. Now the issue is it appropriate for an ordinary Indian Muslim to invest in Shariah compliant stocks?
Normally an investor has following options available with him for investing is savings.
• Bank and financial institutions
• Government bonds
• Real estate
• Gold and other precious items and
Among all the options, first two are not permissible under shariah, so a Muslim investor would not like to engage in that except to the extent of urgency. Real estate is still a highly illiquid market, thus it is good for only those who have substantial saving and also have sufficient time to stay invested. Gold and other precious items are also risky investments and moreover they also require substantial investments.
In all these circumstances, it is only the stocks which gives an ordinary Muslim an option to invest with small sums. This is possible for the smallest of investor. Market liquidity ensures that any time an investor needs money, he can get out. Shariah compliance which is very crucial for a Muslim investor is also possible. All this makes stocks market investments a very good place for the Muslim investor to put his money.
Dr. Shariq Nisar completed his PhD in Economics, majoring in Islamic Banking and Islamic Finance. Has presented papers in various international conferences.
By Siddique Qureshi
Technically we can say it’s appropriate to invest in Shariah compliant stocks. But the stock market culture does not match with the spirit of Islam. The culture of stock market is against the Islamic spirit. Instead of fundamentals, it is speculation. The fundamentals of the concerned corporate or business are not the base for the stock price. In fact, stock market suffers from what British economist John Maynard Keynes called the casino effect: People just continue to pour in money, even by borrowing. At the moment, this cycle is correcting itself. Anything which goes up, at current prices, by 40 per cent is a financial bubble. That’s what has been happening in the stock market; you had 30-60 per cent returns on average. Look at the Reliance Power IPO. Thousands and thousands of crores being bid, even without (the company) generating a single unit of power. All this, even as the market was going to fall. So there could be a shock effect, but not much on the real economy.
Now investment in Reliance Power can be termed as Shariah compliant, but it is against the spirit of Islam. The markets are manipulated. The stock prices are most of the time manipulated by the capitalist who wants to show the projected profits to grab the hard earn money of the investors.
Stock market is growing because it has been projected by the media as a safest and surest way to earn huge profits. Islam value principles does not endorse speculation. How many Muslim investors really care about the fundamentals of the company before buying shares? Majority buy shares because share prices are increasing and they are termed as bullish investors.
Others buy shares because share prices are decreasing and they are termed as bearish investors. Keynes once noted that the stock market is a bit like a beauty contest. Rather than try to pick the most beautiful person, the judges in a Keynesian beauty contest try to figure out which contestant everyone else will pick.
The spirit of Islam guides investors to invest money not just for the sake of profit, but also to keep in mind the benefit of human society. Stock market culture breeds greed and fear. Islamic teachings are against this culture. Islam teaches us to work hard where as Stock market culture promotes the culture of easy money.
The stock market volatility is also against the basic principles of Islam. Once a trader during the reign of Hazrat Omar bin Khattab (RA) started a price war to establish him in the market. He started selling goods at a huge discount which affected the market and many traders suffered losses. When this was brought to the notice of Hazrat Omar, he called upon the said trader and reprimanded him and warned him not to spoil the market.
Islam always promotes stability where as stock market culture relies on volatility.
Siddique Qureshi is associated with the Mumbai based Idara Dawatul Qur’an as general secretary. He conducts Qur’an workshops regularly.