Stock
- Thread starter Branada
- Start date
learnermuslim
Junior Member
Salaams Branada,
Stock is fine as long as naturally Shariah compliant.
You might want to look at Dow Jones Islamic Indexes for such stocks in the non-muslim world and bourses in Islamic (or not) countries like:
Jakarta Stock Exchange
Dubai
Saudi Arabia
Kuala Lumpur
Karachi
Am sure you get the trend.
If you need any further help, look at :
www.aaoifi.com
www.ifsb.org
www.isdb.org
Hope that helps and pray your wealth sky rockets, Ameen.
Fi amanAllah
P.S. pass on a few hints will you
Stock is fine as long as naturally Shariah compliant.
You might want to look at Dow Jones Islamic Indexes for such stocks in the non-muslim world and bourses in Islamic (or not) countries like:
Jakarta Stock Exchange
Dubai
Saudi Arabia
Kuala Lumpur
Karachi
Am sure you get the trend.
If you need any further help, look at :
www.aaoifi.com
www.ifsb.org
www.isdb.org
Hope that helps and pray your wealth sky rockets, Ameen.
Fi amanAllah
P.S. pass on a few hints will you
Happy 2BA Muslim
Islamophilic
:salam2:
Brother, do you mean shares or stocks?
A stock is a written document stating the amount of a loan given by the bearer on a specified date in return for specified interest.
A share is a partner’s portion of the capital of a corporation.
From these definitions we can see the difference between shares and stocks.
The difference between shares and stocks:
1 – A share represents a stake in a company, meaning that the shareholder is a partner, whereas a stock represents a debt owed by the company, meaning that the stockholder is a lender.
Based on this, the shareholder only earns profits when the company makes a profit, whereas the stockholder earns guaranteed annual interest whether the company makes a profit or not.
Also based on this, if the company makes a loss, the shareholder has to bear some part of the loss, depending on the amount of shares he has, because he is a partner and owner of part of the company, so he must bear some part of the loss.
The stockholder, on the other hand, does not bear any of the company’s losses because he is not a partner in the company, rather he is simply a lender, who lends money in return for benefits agreed upon whether the company makes a profit or makes losses.
Ruling on dealing in stocks:
Dealing in stocks is haraam according to sharee’ah, because it is a loan in return for agreed-upon interest, and this is riba (usury) which Allaah has forbidden and warned against, as He says (interpretation of the meaning):
“O you who believe! Fear Allaah and give up what remains (due to you) from Ribaa (from now onward) if you are (really) believers.
And if you do not do it, then take a notice of war from Allaah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)”
[al-Baqarah 2:278-279]
The Messenger (peace and blessings of Allaah be upon him) cursed the one who consumes riba, the one who pays it, the one who writes it down and the two who witness it, and he said: they are all the same. Narrated by Muslim, 2995.
In the second conference of the Islamic Bank in Kuwait 1403 AH/1982 CE it was stated: That which is called interest in the terminology of western economists and those who follow them is the essence of riba that is forbidden according to sharee’ah. End quote.
Majallat al-Majma’ al-Fiqhi, 4/1/732
Zakaah on stocks
Although it is haraam to deal in stocks, zakaah is due on them because they represent a debt owed to their owner, and debts that one hopes will be repaid are subject to zakaah according to the majority of scholars. So its zakaah must be worked out every year, but it need not be paid until one takes possession of the value of the stock. As for the interest that is taken in return for the stock, this is unclean and haraam wealth that must be disposed of by donating it to charitable causes.
The rate of zakaah which must be paid is 2.5 per cent.
Question:
What is the ruling on dealing in bonds that produce fixed returns?
Answer:
Praise be to Allaah.
A bond is a certificate which, according to its terms, obliges the issuer to pay the bearer the face value plus the agreed amount of interest when it reaches maturity, or to pay other benefits, such as prizes awarded by drawing lots, or payment of a fixed amount, or any discaunt.
The Islamic Fiqh Council has researched the matter of dealing in bonds and issued the following statement:
Bonds which represent a commitment to pay the face value plus interest, or conditional benefits, are haraam according to sharee’ah, whether one is buying, selling or handling them, because they are considered to be interest-based loans. This applies whether they are issued by private companies or by public bodies run by the state. The fact that they are forbidden is not affected by giving them other names such as “certificates”, “investment documents” or “savings”, or calling the interest “profit”, “commission” or “returns”.
Also forbidden are bonds that offer prizes, because these are loans made on the condition that the benefits or increase will go to the group loaning the money, or to one of them, who is not specified at the time of investment, in addition to the fact that this is based on the idea of gambling.
Another kind of forbidden bonds, which it is haraam to buy, sell or handle, is bonds or documents based on bidding for a specific project or activity from which the owners will not benefit in any definite way, but will only receive a share of the profits according to the number of bonds or documents that they own, and they will only receive this profit if the project is actually carried out.
And Allaah knows best.
Islam Q&A
Brother, do you mean shares or stocks?
A stock is a written document stating the amount of a loan given by the bearer on a specified date in return for specified interest.
A share is a partner’s portion of the capital of a corporation.
From these definitions we can see the difference between shares and stocks.
The difference between shares and stocks:
1 – A share represents a stake in a company, meaning that the shareholder is a partner, whereas a stock represents a debt owed by the company, meaning that the stockholder is a lender.
Based on this, the shareholder only earns profits when the company makes a profit, whereas the stockholder earns guaranteed annual interest whether the company makes a profit or not.
Also based on this, if the company makes a loss, the shareholder has to bear some part of the loss, depending on the amount of shares he has, because he is a partner and owner of part of the company, so he must bear some part of the loss.
The stockholder, on the other hand, does not bear any of the company’s losses because he is not a partner in the company, rather he is simply a lender, who lends money in return for benefits agreed upon whether the company makes a profit or makes losses.
Ruling on dealing in stocks:
Dealing in stocks is haraam according to sharee’ah, because it is a loan in return for agreed-upon interest, and this is riba (usury) which Allaah has forbidden and warned against, as He says (interpretation of the meaning):
“O you who believe! Fear Allaah and give up what remains (due to you) from Ribaa (from now onward) if you are (really) believers.
And if you do not do it, then take a notice of war from Allaah and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums)”
[al-Baqarah 2:278-279]
The Messenger (peace and blessings of Allaah be upon him) cursed the one who consumes riba, the one who pays it, the one who writes it down and the two who witness it, and he said: they are all the same. Narrated by Muslim, 2995.
In the second conference of the Islamic Bank in Kuwait 1403 AH/1982 CE it was stated: That which is called interest in the terminology of western economists and those who follow them is the essence of riba that is forbidden according to sharee’ah. End quote.
Majallat al-Majma’ al-Fiqhi, 4/1/732
Zakaah on stocks
Although it is haraam to deal in stocks, zakaah is due on them because they represent a debt owed to their owner, and debts that one hopes will be repaid are subject to zakaah according to the majority of scholars. So its zakaah must be worked out every year, but it need not be paid until one takes possession of the value of the stock. As for the interest that is taken in return for the stock, this is unclean and haraam wealth that must be disposed of by donating it to charitable causes.
The rate of zakaah which must be paid is 2.5 per cent.
Ruling on dealing in bonds
Question:
What is the ruling on dealing in bonds that produce fixed returns?
Answer:
Praise be to Allaah.
A bond is a certificate which, according to its terms, obliges the issuer to pay the bearer the face value plus the agreed amount of interest when it reaches maturity, or to pay other benefits, such as prizes awarded by drawing lots, or payment of a fixed amount, or any discaunt.
The Islamic Fiqh Council has researched the matter of dealing in bonds and issued the following statement:
Bonds which represent a commitment to pay the face value plus interest, or conditional benefits, are haraam according to sharee’ah, whether one is buying, selling or handling them, because they are considered to be interest-based loans. This applies whether they are issued by private companies or by public bodies run by the state. The fact that they are forbidden is not affected by giving them other names such as “certificates”, “investment documents” or “savings”, or calling the interest “profit”, “commission” or “returns”.
Also forbidden are bonds that offer prizes, because these are loans made on the condition that the benefits or increase will go to the group loaning the money, or to one of them, who is not specified at the time of investment, in addition to the fact that this is based on the idea of gambling.
Another kind of forbidden bonds, which it is haraam to buy, sell or handle, is bonds or documents based on bidding for a specific project or activity from which the owners will not benefit in any definite way, but will only receive a share of the profits according to the number of bonds or documents that they own, and they will only receive this profit if the project is actually carried out.
And Allaah knows best.
Islam Q&A
American Muslim
Just Another Slave
I thought that stocks fell into the same type of category as insurance. You are basically gambling on future good fortune. Or am I wrong? You really need a scholar to unravel today's economy.
learnermuslim
Junior Member
Salaams Brothers,
As correctly stated by American Muslim and with all due respect to Happy 2BA Muslim, Islamic Economics has moved on and moving to keep up with the times, rest assured it hasn't sold out or the sort. Wanting to save everyone from a Thesis answer forwarded brother to the sites, which are:
Auditing and Accounting Organisation for Islamic Financial Institutions
Islamic Financial Services Board
Islamic Development Bank
Gave the short versions as already suffering from RSS :-(
There you will find Shariah Scholars, professionals to answer your questions.
By the way Insurance too is allowed, only making income from exploitation, or a gauranteed amount regardless of performance is disallowed, in addition other Shariah requirments. But you need to read a few studies to findout for yourself what you deem suitable for you and then decide.
If you want an easy way , ring up any islamic bank and ask them to explain it to you, save you a bit of reading. However, as an intelligent , capable muslim you can not leave your decision ad , or repsonsibility on their "product" and would still need to verify yourself if what they say/sell meets with your expectations.
These guys might help too:
www.umfinancial.com
Canadian IFI (islamic Financial Institution)
Hope that helps.
Fi amanAllah
As correctly stated by American Muslim and with all due respect to Happy 2BA Muslim, Islamic Economics has moved on and moving to keep up with the times, rest assured it hasn't sold out or the sort. Wanting to save everyone from a Thesis answer forwarded brother to the sites, which are:
Auditing and Accounting Organisation for Islamic Financial Institutions
Islamic Financial Services Board
Islamic Development Bank
Gave the short versions as already suffering from RSS :-(
There you will find Shariah Scholars, professionals to answer your questions.
By the way Insurance too is allowed, only making income from exploitation, or a gauranteed amount regardless of performance is disallowed, in addition other Shariah requirments. But you need to read a few studies to findout for yourself what you deem suitable for you and then decide.
If you want an easy way , ring up any islamic bank and ask them to explain it to you, save you a bit of reading. However, as an intelligent , capable muslim you can not leave your decision ad , or repsonsibility on their "product" and would still need to verify yourself if what they say/sell meets with your expectations.
These guys might help too:
www.umfinancial.com
Canadian IFI (islamic Financial Institution)
Hope that helps.
Fi amanAllah
American Muslim
Just Another Slave
Br. Learner, Just like an american muslim, I wouldn't have thought there were many muslim economists. lol, I think I just met one.
virtualeye
Tamed Brother
AssalaamuAlaikum,
There are some Islamic banks which do the 100% Islamic banking. You might invest in them. In our country we have Bank Albarqah, Bank Alfalah, Meezaan Bank etc.
It is better to invest in the shares of a company owned by Muslims. Better look for shares in some Malaysian companies. Otherwise there are a number of scholars who consider the investement in stock as Haraam due to the current miserable gambling and ribah (interest) related issues.
And how about not being enclosed in the pandora box of Americanism and come out to invest in some third world Muslim country where Muslims can get benefit of it.
Wassalaam,
VE
learnermuslim
Junior Member
Brother AM,
You're lucky as well as like to many cooks, meeting to many economists might be bad for your health, or at least your sanity
You're lucky
as well as like to many cooks, meeting to many economists might be bad for your health, or at least your sanity
Happy 2BA Muslim
Islamophilic
Asalamu alaikum Brothers,
I am really not into stocks. I admit. I`m just a poor physician who treats people who work with stocks. jk
The Islam Q&A fatwa was a general one. I thought the brother who opened the thread wanted a more detailed answer on this subject.
I suggest sending any specific questions on this matter to Islamonline.net who have a well-known scholar in Islamic economics and is a financial counsellor- Dr. Monzer Kahf.
Here are a few questions and answers which i thought might be helpful:
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503543638
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503543496
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503543492
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503544012
I am really not into stocks. I admit. I`m just a poor physician who treats people who work with stocks. jk
The Islam Q&A fatwa was a general one. I thought the brother who opened the thread wanted a more detailed answer on this subject.
I suggest sending any specific questions on this matter to Islamonline.net who have a well-known scholar in Islamic economics and is a financial counsellor- Dr. Monzer Kahf.
Here are a few questions and answers which i thought might be helpful:
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503543638
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503543496
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503543492
http://www.islamonline.net/servlet/...h-Ask_Scholar/FatwaE/FatwaE&cid=1119503544012
virtualeye
Tamed Brother
Asalamu alaikum Brothers,
I am really not into stocks. I admit. I`m just a poor physician who treats people who work with stocks. jk
You made my day. This must be the perfect joke rightly fitting on the question. Nice.
Wassalaam,
VE
learnermuslim
Junior Member
Dear Brother Happy 2BA Muslim,
Assalaam Alaikum.
As per brother virtualeyes comment, lol.
Also brother, I pray you did not take my comments in any bad way, they were not meant that way and apologise if they came across in such a manner, your inputs are just as valid and informative.
Forgive me if my words caused any offence, ill feeling.
Fi amanAllah.
Assalaam Alaikum.
As per brother virtualeyes comment, lol.
Also brother, I pray you did not take my comments in any bad way, they were not meant that way and apologise if they came across in such a manner, your inputs are just as valid and informative.
Forgive me if my words caused any offence, ill feeling.
Fi amanAllah.
Happy 2BA Muslim
Islamophilic
Not at all my dear Brother. On the contrary, I learnt from your replies. Jazak Allahu khayran. We are all hear to learn from one another.
learnermuslim
Junior Member
Dear Brother Happy 2 BA Muslim,
ASA
JazakAllah for your understanding and viewpoint.
ASA
JazakAllah for your understanding and viewpoint.
TheHumbleWun
Banned
Salaamalikum,
Investing in the stock market: Is passive income permissible?
As mentioned in an earlier post, investing in the stock market and buying shares of a particular company is permissible, according to the majority of contemporary scholars, provided four conditions are met:
1) The main business of the company is lawful,
2) The company must have some liquid assets in its possession,
3) One raises his objection to the company’s interest-based transactions,
4) The proportion of the company’s income gained through interest-based dealings is given in charity.
As far as all the partners having physical contact and knowing one another, that is not necessary. It is not necessary Islamically that all the partners of a business know one another, remain in contact or have direct influence in the running of the business.
When one purchases the shares of a company, one will be considered a partner and share-holder of the business, hence all the rules of partnership (shirka) will apply.
In partnership, if all the partners agree to work together, then each one will be treated as an agent of the other in all matters of the business, and any work done by one of them in the normal course of business shall be deemed to be authorized by all of them.
However, if they agree that some partners will manage the business whilst the others will be considered to be sleeping partners, then that is also permissible. (See for details: Islamic finance, P. 42-43)
As far as the moral aspect (towards which you have pointed out) is concerned, that is another matter altogether. This would depend on the company of which one is being a partner, and the whole idea of the evils connected to the stock market trading. Thus, if one was to avoid investing in the stock market due this, it would certainly be a commendable act.
Permissibility of and Zakat on 401k plan & other securities
The 401K Plan
401k refers to an IRS Code that allows employers to set up retirement plans for their employees. This company-sponsored benefit allows employees to invest money from their paychecks into an investment vehicle on a pre-tax basis, meaning no taxes will be charged for investing until the employee decides to make a withdrawal from his or her plan at the age of 59 1/2. The employer can encourage the employee by also contributing to the plan by matching or partially matching the investment of each employee. All of money invested (up to a certain predefined limit), along with any investment or matching from the employer, is put into an account that is invested into funds (i.e. money market, fixed income, or equity), as chosen by the employee from a list of funds offered by the company.
To understand the Islamic ruling regarding of permissibility or impermissibility of a 401K plan, we first need to understand the different rulings regarding the various types of investment instruments that may be associated with a 401K Plan.
Individual Retirement Account (IRA)
An Individual Retirement Account is traditionally a retirement plan where individuals can deposit funds into an account that will earn interest with the goal of augmenting an individual’s retirement savings. An IRA is different than a 401k because an IRA earns a fixed-rate of interest. It is not an investment so it does not have the ability to earn a higher rate of return in a lucrative market. Conversely, it is safe during periods of market correction.
It is very clear that investing in such an IRA is impermissible since it is not considered an investment (hence no chance of loss on invested capital). It is similar to an interest bearing deposit such as a saving account.
Note: However, an IRA in many cases (of recent) can also be set up with an institution like a broker (called brokerage IRAs) to invest in lawful stocks at one’s own discretion. This could be a good lawful investment option if the stocks one invests in meet the criteria highlighted below.
Mutual Funds
A Mutual Fund is an investment entity, usually a corporation that sells shares to investors, usually individuals, in exchange for a portion of the Fund’s investment portfolio. Different funds are designed to meet the requirements of various types of investors. For example, fixed income / bond funds are available for investors seeking moderate returns and low risk and equity / stock funds are accessible for those who are willing to accept more risk exchange for potentially higher returns.
Investing in Mutual Funds is permissible if one restricts his or herself to investing only in equity / stock funds whose portfolios consist of lawful companies. Investing into fixed income / bond funds is impermissible since the returns are derived from interest-bearing securities.
Money Market Fund
A Money Market Fund is a mutual fund that invests in short-term interest bearing securities and sometimes allows its investors to have a debit card associated with it and write checks against their accounts. Since the investments are made into short-term securities (which typically mature within one year), these funds are very low-risk. Investing in Money Market Funds is impermissible since the pool of investments consists of interest-bearing assets.
Bonds, Bills and Notes
These are debt obligations under which the borrower, typically a corporation of governmental entity, agrees to make specified payments of interest for the money it borrows (the “face value” or principal). For example, a corporation may issue a bond which will mature in 5 years with a face value of $1,000 and promise to make annual interest payments of 10% per year. In this case, the bondholder will earn $100 a year for five years and after the fifth year will be given back his or her initial investment of $1,000 as long as the corporation does not default. The interest / expected return of each of a bond depends on the degree of risk, which determined by independent ratings agencies. Bonds issued by governmental entities typically have a lower expected return than those issued by corporations since the chances of governmental entities defaulting are smaller.
Investing in Bonds is also impermissible since they are essentially loans that promise to pay back the face value plus interest.
Certificate of Deposit (CD)
A Certificate of Deposit is a savings certificate at various denominations issued primarily by commercial banks where the holder receives interest at a specified rate upon maturity. Investing in Certificates of Deposition is impermissible because the gains of the investment are earned from interest.
Stocks
A Stock, Share, or Equity, is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred. Common stock usually gives the shareholder voting rights and allows them to receive dividends declared by the company. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock are given priority over owners of common stock in the event of bankruptcy
It is permissible to invest in common stocks as long as the company one is investing is in compliance with the following conditions (as highlighted below by Justice Mufti Taqi Uthmani, a renowned and respected scholar in the field of finance and economics):
1. The main business of the company is not in violation of Shari‘a. 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 Sharī‘a, such as the companies manufacturing, selling or offering liquors, pork, harām meat, or involved in gambling, night club activities, *!*!*!*!ography etc.
2. If the main business of the companies is halāl, 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.
3. 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.
4. 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. [Please visit http://albalagh.net/Islamic_economics/finance.shtml for complete fatwa and explanations]
Now that we understand the independent rulings of the securities mentioned above, we are given a better picture of what types of 401k plans would be lawful and unlawful to invest in. Based on what we have examined it is therefore permissible to invest in a 401K plan as long as the mutual fund selected is in compliance with the Sharī‘a.
The problem that arises at this point is that the majority of the funds offered by companies for this plan do not include Islamic funds (such as the Dow Jones Islamic Fund) or even ethical funds, (which are not necessarily lawful since they may not meet all the requirements to be in compliance with the Sharī‘a). Nevertheless, if a Sharī‘a compliant fund is offered then it would be permissible to invest in it as part of one’s 401k plan. In this regard any amount matched or contributed by one’s employer toward the 401K plan is also permissible.
Existing Investments in non-lawful 401k plans
As for 401K investments already held in an unlawful mutual fund, one should opt to switch his or her holdings out of the existing fund and reallocate the money into a Shari‘a compliant Fund . In the case where one’s company does not include any lawful mutual funds then one may be able to make such a request, like including the Dow Jones Islamic Funds as an option. If this is not a possibility then it would be necessary to withdraw the funds from one’s plan and either transfer over (roll over) to another lawful plan (such as a brokerage IRA consisting of lawful stocks) or consider other investing venues, even though there will be a penalty for an early withdrawal. Whatever money is received by the person in this case, only the original capital amount invested by the person and that which has been added by one’s company will be permissible for one to retain. All excess will have to be disposed off to the poor without intention for reward.
Zakāt on 401k plans
Given that one cannot withdraw from 401K plans until one is 59.5 years old without facing a penalty, the question comes up as to how and when zakāt needs to be paid on this.
Since lawful 401K plans are considered business investments, the money invested does not come under the definition of being a debt and thus zakāt is necessary each year as long as the total amount (along with any other savings a person has, minus any debts) meets the zakāt quantum [nisāb] which is approximately $140. One is obliged to pay 2.5 percent on the total value of one’s investments (which includes one’s own investment, along with any amount added by one’s employer that has vested [i.e. the money is now considered the employees since some companies release the amounts contributed by themselves in installments so the employees cannot take the whole amount at once], and any gain or profits that have since been accumulated. In other words the zakātable amount will be the amount a person would consider his or hers at that time even if he was to leave his employment.
For instance, if a person’s total personal investments in his or her 401K plan are $5,000.00 along with $2,500.00 matched by the employer, then the zakāt will be 2.5% of $7,500.00 which is $187.50 for that year.
If he or she has an additional $2,500.00 in other zakātable assets like cash in hand or inventory, etc. then the total zakātable income is $10,000.00, hence, his zakāt will be $250.00 for that year.
Any penalty amount or taxes that one would have to pay if they did a premature withdrawal of their investment are not exempted from the total zakātable income each year, unless a person makes such a withdrawal or cancels his or her plan. In this case he or she would only pay zakāt on the amount left on the day the zakāt becomes due after deducting any penalties or taxes.
Mutual Funds: Are they allowed?
A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy).
By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification.
Diversification is the idea of spreading out your money across many different types of investments. When one investment is down another might be up. Choosing to diversify your investment holdings reduces your risk tremendously.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks (even hundreds or thousands). Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, low-grade corporate bonds, international small companies).
The ruling with regards to mutual funds from an Islamic perspective can be determined by understanding the Shar’i ruling on shares and bonds.
The ruling with regards to investing in shares is that this is permissible (according to the majority of contemporary scholars), provided the following conditions are met:
1) The main business of the company must be lawful (halal). Therefore, to purchase shares of a company whose main business is unlawful, such as interest bearing banks, insurance companies, companies manufacturing and selling liquor, etc will not be permitted.
If the main business of the company is Halal, such as a textile company or a telecommunication company, then it will be permissible to subscribe to its shares.
2) Many companies, despite their main business being Halal may be involved in interest dealings in one way or another. Due to this, the following is necessary:
a) One should object to the interest dealings, preferably in the annual AGM. By doing so, the responsibility will be deemed fulfilled.
b) When the dividend is distributed, the proportion of the company’s income which was gained by interest dealings must be given in charity without the intention of receiving reward, as is the case with unlawful money in general. This amount (interest accumulation) may be known by means of the income statement.
3) The company whose shares one intends to purchase must have some illiquid assets in its possession. It must not all be in liquid form (i.e. cash, cheques, bonds, etc…). If all of the company’s assets are in liquid form, then the share cannot be sold or purchased except at face value.
With regards to bonds, the ruling is that, it is not permissible to invest in them. Premium bonds do not represent the ownership of the holder in a company or a financial institution; rather it only signifies giving a loan to the issuers of these bonds.
Due to this fact, the excess amount received on these bonds, which is stipulated and sought from the contract, is regarded as usury (riba), and is thus unlawful (haram).
Now, if investing in a mutual fund is regarded as purchasing the shares of the fund and becoming a share holder, then the ruling is that this is not permissible. The reason being, that one of the conditions for the permissibility of purchasing shares was that the company has some illiquid assets (see condition, 3), and the fund here is a combination of peoples investments.
If the case is that the fund is merely acting as an intermediary for the investment in shares and bonds, then this would also be impermissible. The reason being, that one is unaware what kind of companies the fund will invest into. Also, the funds normally invest in bonds, which have been declared unlawful.
And Allah knows best
Investing in the stock market: Is passive income permissible?
As mentioned in an earlier post, investing in the stock market and buying shares of a particular company is permissible, according to the majority of contemporary scholars, provided four conditions are met:
1) The main business of the company is lawful,
2) The company must have some liquid assets in its possession,
3) One raises his objection to the company’s interest-based transactions,
4) The proportion of the company’s income gained through interest-based dealings is given in charity.
As far as all the partners having physical contact and knowing one another, that is not necessary. It is not necessary Islamically that all the partners of a business know one another, remain in contact or have direct influence in the running of the business.
When one purchases the shares of a company, one will be considered a partner and share-holder of the business, hence all the rules of partnership (shirka) will apply.
In partnership, if all the partners agree to work together, then each one will be treated as an agent of the other in all matters of the business, and any work done by one of them in the normal course of business shall be deemed to be authorized by all of them.
However, if they agree that some partners will manage the business whilst the others will be considered to be sleeping partners, then that is also permissible. (See for details: Islamic finance, P. 42-43)
As far as the moral aspect (towards which you have pointed out) is concerned, that is another matter altogether. This would depend on the company of which one is being a partner, and the whole idea of the evils connected to the stock market trading. Thus, if one was to avoid investing in the stock market due this, it would certainly be a commendable act.
Permissibility of and Zakat on 401k plan & other securities
The 401K Plan
401k refers to an IRS Code that allows employers to set up retirement plans for their employees. This company-sponsored benefit allows employees to invest money from their paychecks into an investment vehicle on a pre-tax basis, meaning no taxes will be charged for investing until the employee decides to make a withdrawal from his or her plan at the age of 59 1/2. The employer can encourage the employee by also contributing to the plan by matching or partially matching the investment of each employee. All of money invested (up to a certain predefined limit), along with any investment or matching from the employer, is put into an account that is invested into funds (i.e. money market, fixed income, or equity), as chosen by the employee from a list of funds offered by the company.
To understand the Islamic ruling regarding of permissibility or impermissibility of a 401K plan, we first need to understand the different rulings regarding the various types of investment instruments that may be associated with a 401K Plan.
Individual Retirement Account (IRA)
An Individual Retirement Account is traditionally a retirement plan where individuals can deposit funds into an account that will earn interest with the goal of augmenting an individual’s retirement savings. An IRA is different than a 401k because an IRA earns a fixed-rate of interest. It is not an investment so it does not have the ability to earn a higher rate of return in a lucrative market. Conversely, it is safe during periods of market correction.
It is very clear that investing in such an IRA is impermissible since it is not considered an investment (hence no chance of loss on invested capital). It is similar to an interest bearing deposit such as a saving account.
Note: However, an IRA in many cases (of recent) can also be set up with an institution like a broker (called brokerage IRAs) to invest in lawful stocks at one’s own discretion. This could be a good lawful investment option if the stocks one invests in meet the criteria highlighted below.
Mutual Funds
A Mutual Fund is an investment entity, usually a corporation that sells shares to investors, usually individuals, in exchange for a portion of the Fund’s investment portfolio. Different funds are designed to meet the requirements of various types of investors. For example, fixed income / bond funds are available for investors seeking moderate returns and low risk and equity / stock funds are accessible for those who are willing to accept more risk exchange for potentially higher returns.
Investing in Mutual Funds is permissible if one restricts his or herself to investing only in equity / stock funds whose portfolios consist of lawful companies. Investing into fixed income / bond funds is impermissible since the returns are derived from interest-bearing securities.
Money Market Fund
A Money Market Fund is a mutual fund that invests in short-term interest bearing securities and sometimes allows its investors to have a debit card associated with it and write checks against their accounts. Since the investments are made into short-term securities (which typically mature within one year), these funds are very low-risk. Investing in Money Market Funds is impermissible since the pool of investments consists of interest-bearing assets.
Bonds, Bills and Notes
These are debt obligations under which the borrower, typically a corporation of governmental entity, agrees to make specified payments of interest for the money it borrows (the “face value” or principal). For example, a corporation may issue a bond which will mature in 5 years with a face value of $1,000 and promise to make annual interest payments of 10% per year. In this case, the bondholder will earn $100 a year for five years and after the fifth year will be given back his or her initial investment of $1,000 as long as the corporation does not default. The interest / expected return of each of a bond depends on the degree of risk, which determined by independent ratings agencies. Bonds issued by governmental entities typically have a lower expected return than those issued by corporations since the chances of governmental entities defaulting are smaller.
Investing in Bonds is also impermissible since they are essentially loans that promise to pay back the face value plus interest.
Certificate of Deposit (CD)
A Certificate of Deposit is a savings certificate at various denominations issued primarily by commercial banks where the holder receives interest at a specified rate upon maturity. Investing in Certificates of Deposition is impermissible because the gains of the investment are earned from interest.
Stocks
A Stock, Share, or Equity, is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred. Common stock usually gives the shareholder voting rights and allows them to receive dividends declared by the company. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock are given priority over owners of common stock in the event of bankruptcy
It is permissible to invest in common stocks as long as the company one is investing is in compliance with the following conditions (as highlighted below by Justice Mufti Taqi Uthmani, a renowned and respected scholar in the field of finance and economics):
1. The main business of the company is not in violation of Shari‘a. 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 Sharī‘a, such as the companies manufacturing, selling or offering liquors, pork, harām meat, or involved in gambling, night club activities, *!*!*!*!ography etc.
2. If the main business of the companies is halāl, 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.
3. 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.
4. 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. [Please visit http://albalagh.net/Islamic_economics/finance.shtml for complete fatwa and explanations]
Now that we understand the independent rulings of the securities mentioned above, we are given a better picture of what types of 401k plans would be lawful and unlawful to invest in. Based on what we have examined it is therefore permissible to invest in a 401K plan as long as the mutual fund selected is in compliance with the Sharī‘a.
The problem that arises at this point is that the majority of the funds offered by companies for this plan do not include Islamic funds (such as the Dow Jones Islamic Fund) or even ethical funds, (which are not necessarily lawful since they may not meet all the requirements to be in compliance with the Sharī‘a). Nevertheless, if a Sharī‘a compliant fund is offered then it would be permissible to invest in it as part of one’s 401k plan. In this regard any amount matched or contributed by one’s employer toward the 401K plan is also permissible.
Existing Investments in non-lawful 401k plans
As for 401K investments already held in an unlawful mutual fund, one should opt to switch his or her holdings out of the existing fund and reallocate the money into a Shari‘a compliant Fund . In the case where one’s company does not include any lawful mutual funds then one may be able to make such a request, like including the Dow Jones Islamic Funds as an option. If this is not a possibility then it would be necessary to withdraw the funds from one’s plan and either transfer over (roll over) to another lawful plan (such as a brokerage IRA consisting of lawful stocks) or consider other investing venues, even though there will be a penalty for an early withdrawal. Whatever money is received by the person in this case, only the original capital amount invested by the person and that which has been added by one’s company will be permissible for one to retain. All excess will have to be disposed off to the poor without intention for reward.
Zakāt on 401k plans
Given that one cannot withdraw from 401K plans until one is 59.5 years old without facing a penalty, the question comes up as to how and when zakāt needs to be paid on this.
Since lawful 401K plans are considered business investments, the money invested does not come under the definition of being a debt and thus zakāt is necessary each year as long as the total amount (along with any other savings a person has, minus any debts) meets the zakāt quantum [nisāb] which is approximately $140. One is obliged to pay 2.5 percent on the total value of one’s investments (which includes one’s own investment, along with any amount added by one’s employer that has vested [i.e. the money is now considered the employees since some companies release the amounts contributed by themselves in installments so the employees cannot take the whole amount at once], and any gain or profits that have since been accumulated. In other words the zakātable amount will be the amount a person would consider his or hers at that time even if he was to leave his employment.
For instance, if a person’s total personal investments in his or her 401K plan are $5,000.00 along with $2,500.00 matched by the employer, then the zakāt will be 2.5% of $7,500.00 which is $187.50 for that year.
If he or she has an additional $2,500.00 in other zakātable assets like cash in hand or inventory, etc. then the total zakātable income is $10,000.00, hence, his zakāt will be $250.00 for that year.
Any penalty amount or taxes that one would have to pay if they did a premature withdrawal of their investment are not exempted from the total zakātable income each year, unless a person makes such a withdrawal or cancels his or her plan. In this case he or she would only pay zakāt on the amount left on the day the zakāt becomes due after deducting any penalties or taxes.
Mutual Funds: Are they allowed?
A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund.
Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy).
By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification.
Diversification is the idea of spreading out your money across many different types of investments. When one investment is down another might be up. Choosing to diversify your investment holdings reduces your risk tremendously.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks (even hundreds or thousands). Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, low-grade corporate bonds, international small companies).
The ruling with regards to mutual funds from an Islamic perspective can be determined by understanding the Shar’i ruling on shares and bonds.
The ruling with regards to investing in shares is that this is permissible (according to the majority of contemporary scholars), provided the following conditions are met:
1) The main business of the company must be lawful (halal). Therefore, to purchase shares of a company whose main business is unlawful, such as interest bearing banks, insurance companies, companies manufacturing and selling liquor, etc will not be permitted.
If the main business of the company is Halal, such as a textile company or a telecommunication company, then it will be permissible to subscribe to its shares.
2) Many companies, despite their main business being Halal may be involved in interest dealings in one way or another. Due to this, the following is necessary:
a) One should object to the interest dealings, preferably in the annual AGM. By doing so, the responsibility will be deemed fulfilled.
b) When the dividend is distributed, the proportion of the company’s income which was gained by interest dealings must be given in charity without the intention of receiving reward, as is the case with unlawful money in general. This amount (interest accumulation) may be known by means of the income statement.
3) The company whose shares one intends to purchase must have some illiquid assets in its possession. It must not all be in liquid form (i.e. cash, cheques, bonds, etc…). If all of the company’s assets are in liquid form, then the share cannot be sold or purchased except at face value.
With regards to bonds, the ruling is that, it is not permissible to invest in them. Premium bonds do not represent the ownership of the holder in a company or a financial institution; rather it only signifies giving a loan to the issuers of these bonds.
Due to this fact, the excess amount received on these bonds, which is stipulated and sought from the contract, is regarded as usury (riba), and is thus unlawful (haram).
Now, if investing in a mutual fund is regarded as purchasing the shares of the fund and becoming a share holder, then the ruling is that this is not permissible. The reason being, that one of the conditions for the permissibility of purchasing shares was that the company has some illiquid assets (see condition, 3), and the fund here is a combination of peoples investments.
If the case is that the fund is merely acting as an intermediary for the investment in shares and bonds, then this would also be impermissible. The reason being, that one is unaware what kind of companies the fund will invest into. Also, the funds normally invest in bonds, which have been declared unlawful.
And Allah knows best