Financial Paper (Shares and Bonds) - Appendix (The Shariah Basis for the Standard)

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1. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) Appendix (B) The Shari’ah Basis for the Standard Issuance of Shares ■ The basis for the permissibility of the issuance of shares, when the objectives for which the corporation has been established are permissible, is the basis for the permissibility of the corporation (Sharikat al-Musahamah), which is the generality of the evidences conveying the obligation of abiding by contracts and conditions, the generality of the evidences conveying the permissibility of partnership, and the generality of the evidences conveying the permissibility of ’Inan, Mudarabah, Musaqat and Muzara’ah. ’Inan is the basis for the permissibility of participation by two or more persons with their wealth and labour, just as Mudarabah, Musaqat and Muzara’ah are the basis for the permissibility of participation with wealth from one side and labour from the other side whether the subject-matter of the contract is cash, as in the case of Mudarabah, or is tangible assets that are developed with work on these assets, as in the case of Musaqat and Muzara’ah. The evidences for all these forms are well known. ■ The basis for the permissibility of underwriting the issue without compensation is that it is an undertaking that does not have a counter-value, which is the taking of compensation for it. In this regard a resolution of the International Islamic Fiqh Academy has been issued.(2) ■ The basis for the impermissibility of the issuance of preference shares, that is, in other than the prescribed manner, is that this leads to the severance of participation in profit and the imposition of injustice on the other shareholders.(3) ■ The basis for the impermissibility of issuing Tamattu’ shares is that the owners of these shares claim their rights to profit and their redemption is (2) International Islamic Fiqh Academy Resolution No. 63 (1/7) on Financial Markets. (3) International Islamic Fiqh Academy Resolution No. 63 (1/7) on Financial Markets. 572
2. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) only in form as they continue to be owners of these share and are entitled to rights at the time of liquidation. ■ The basis for the permissibility of share being in a person’s name, at his order, or for bearer is that the Lawgiver wishes to establish rights through writing and other forms, but He has not determined a particular form for this. If -in the case of corporations- this takes place through the issuance of shares on which names of the shareholders are written then this is valid. Likewise, if this is undertaken by recording the names of the shareholders in special registers, or indexes, or in any other way, or even if the names are not recorded at all -neither on the certificates nor elsewhere- then this is permissible. Trading in Shares ■ The basis for the permissibility of the sale and purchase of shares of corporations, when the activity of the corporation is permissible, is that the shares are owned by the shareholder, and he has the right to undertake transactions in them as he desires whether this is by way of sale, gift or another way, especially when each one of the shareholders has been granted permission to undertake such transactions through their participation ci pation in the memorandum of the corporation and by subscribing to it. ■ The basis for the permissibility of participation by one who has the ability to convert or makes an effort to convert insofar as that is a means to alter the rejected and belongs to the category of al-Amr BilMa’ruf Wa al-Nahy ’An al-Munkar (enjoining good and forbidding evil), which is an act approved by acknowledged evidences. In this regard a jurstic opinion (Fatwa) has been issued by the Third Seminar on Financial Markets.(4) ■ The basis for exempting trading in the shares of these corporations, whose primary activity is permissible, however, they deposit amounts and borrow on the basis of interest, is the application of the rule of removal of hardship and acknowledging of general need, widespread practice, the acknowledged principles of surplus, shortage and predominance,(5)as well (4) Held in the Kingdom of Bahrain during Jumada I, 1412 A.H., corresponding to November 1991 A.D. (5) “Al-Furuq” by Al-Qarafi [4: 104]; “Al-Muwafaqat” [1: 37]; “Ahkam Al-Qur`an” by Ibn Al-Arabi [4: 1804]; and “Qawa’id Al-Ahkam Fi Masalih Al-Anam” [1: 18, 41-45]. 573
3. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) ■ ■ ■ ■ ■ as the permissibility of dealing with one the major part of whose wealth is permissible,(6)along with reliance upon the issue of separation of bargains according to some Jurists.(7) This is upheld by most fatwa issuing organisations as well as the Shari’ah Supervisory Boards of Islamic banks.(8) The basis of the impermissibility of buying shares by raising interest-bearing loans from the broker or someone else, is the indulgence in interest and securing this through mortgage, and these are activities prohibited by the Texts along with a curse for those who charge Riba, pay it, write it down and witness it. The basis for the impermissibility of the sale of shares that the seller does not own is that this leads to the sale of something that is not within the liability of the seller nor in his ownership, and this is prohibited according to the Shari’ah. The basis for the permissibility of undertaking transactions in shares even though the final registration formalities have not been completed is the transfer of the liability for loss ((Daman Daman)) to the buyer. This is attained through constructive possession that is granted through the transacting in what he has purchased. The basis for the impermissibility of lending the shares of corporations is that the share at the time of repayment-in consideration of what it represents-does not represent the same thing that it did at the time of lending due to the constant change in the assets of the corporation. The basis for the permissibility of mortgaging the shares of corporations is the established principle that a thing can be mortgaged if its sale is permissible. As the sale of shares is permitted, mortgaging them is also permitted. The reason is that the purpose of a mortgage is the securing of a loan and recovering it through the sale price of the asset mortgaged in case recovery is not possible from the debtor. This is what is achieved through the mortgaging of shares and is, therefore, permitted. (6) “Bada`i’ Al-Sana`i’” [4: 104]; “Al-Ashbah Wa Al-Naza`ir by Ibn Nujaym (pp. 112-114); “Al-Bayan Wa Al-Tahsil” [18: 194-95]; and “Al-Manthur Fi Al-Qawa’id” [2: 335]. (7) “Fath al-Qadir [6: 89-90]; “’Iqd “ Iqd Al-Jawahir Al-Thaminah” [3: 439]; “Al-Sharh Al-Kabir Ma’a Al-Dusuqi [3: 15]; “Al-Rawdah” [3: 420-25]; and “Majmu’ Al-Fatawa” [29: 48]. (8) Among these is Al Rajhi Organization in its resolution No. 48, 23/8/1422 A.H. 574
4. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) ■ The basis for the impermissibility of Salam in shares is that the subject-matter of Salam is a debt and not an ascertained thing, while in shares of corporations nothing works except ascertainment. This is done by mentioning the name of the corporation whose shares are desired through Salam thereby rendering the shares an ascertained thing and not a liability for a debt. Shares cannot, therefore, essentially be the subject-matter of the contract of Salam. Further, Salam in shares implies the sale of ascertained things that are not owned and this is not permitted. In addition to this, the constant availability of specified shares in the market and the ability of the buyer to deliver them at the end of the period is something that cannot be guaranteed. ■ The impermissibility of concluding futures contracts for shares is that these contracts imply the stipulation of delay in the delivery of an ascertained sold commodity, that is, shares, and this prohibited and not permitted. Likewise, the delay in the price and the priced commodity, for this is the sale of a debt for a debt, which is prohibited by agreement. Further, the seller -mostly- does not own the shares for which the futures contract has been concluded and is, therefore, selling something that is owned by another. This is something over which there is no disagreement among the scholars as to its impermissibility. It is also included primarily in the meaning of the Shari’ah Texts established By Prophet Muhammad (peace be upon him) that convey the prohibition of the sale of something that one does not possess. Again, most of the futures contracts are completed through a cash settlement between the parties, and this is brazen gambling if this is stipulated within the contract. If it is not stipulated in the contract, it is still one type of gambling. Thereafter, the purpose of contracts is the delivery of possession, while in futures contracts delivery of possession is not the primary purpose of the contracting parties. These contracts, thus, create an obligation for, and engage the liability of, each party for a debt that is of no benefit, except by way of Mukhatarah and for waiting for a loss that will inevitably be incurred by one party. ■ The basis for the impermissibility of concluding options contracts for shares is the right of option- which is the subject-matter of options 575
5. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) contracts transacted in financial markets- is not included in rights that can be sold. The reason is that this right is not established at all for the seller as it is created through the contract and after its creation it is not related to wealth rather it is related to an abstract thing, that is, sale and purchase. If established rights cannot be sold when these do not relate to wealth, like the right of pre-emption, the right to custody of children, the right of Qisas, then, rights -like the right of option- cannot be permitted in the first instance. Added to this is the fact that dealing in options contracts is based on Gharar, and Gharar is prohibited, just like dealing in options contracts is based upon gambling and games of chance, equally for the buyer and the seller of a right to an option, and this occurs in cases that terminate in a cash settlement between the two parties. The contract for an option falls under the sale by a person of something that he does not own when he writes an option to buy, for he does not own the shares or commodities that he undertakes to sell; and the sale of what one does not own is prohibited according to the Shari’ah. ■ The basis for the impermissibility of concluding swap contracts for the dividends of shares is that these contracts include Riba in both its forms if the contracts involve the same currency, or Riba al-Nasi`h alone if it involves two different currencies; the sale of a debt for a debt as it is a contract in which both counter-values are deferred; Gharar due to the uncertainty about the amount of the cash at the time of the contract; gambling, as the purpose of these contracts is the acquisition of the difference between the two average returns on the shares and it is not the delivery of possession, which is the purpose of contracts, thus, one of the parties gains and the other inevitably loses, and this is truly gambling. Each one of these prohibitions alone is sufficient to prohibit this type of contracts, then what about all of them collectively? ■ The basis for the permissibility of trading in shares or corporations, which include cash assets and debts, without regard for the rules of Sarf and dealing in debts, even when such debts are more than one-half, is that in such circumstances such assets are deemed secondary, and in secondary things matters that are not normally overlooked otherwise are overlooked. If, however, the tangible assets and benefits are less than a third, it is not 576
6. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) permitted to deal in the shares, except by observing the rules of Sarf or transactions in debts, because in such a case the assets and benefits are meagre and here debts and cash cannot be deemed secondary to them, and they are the primary objective of the contract, thus, those conditions are to be stipulated for them that would be applied to them if they were desired separately. ■ The basis for the permissibility of trading in shares of corporations whose assets include debts and cash, when the objective and activity of the corporation is dealing in things and benefits, without regard for the percentage of debts and cash, is as follows: 1. The Hadith of Ibn Umar (may Allah be pleased with him) stating: “... When a person buys a slave, who has wealth, then the wealth is for the seller, unless the buyer stipulates this too.”(9)The Hadith is explicit on the permissibility of the sale without regard for the genus of the price. The general meaning of the Arabic term ““Mal Mal”” in the Hadith includes all his wealth whether this is cash, debts or goods and whether this is less or more. It indicates that debts or cash, less or more, in comparison with the price of the slave are not taken into account in the Hukm, because they are in this case secondary and are not the primary purpose of the contract. Imam Malik relates this Hadith in Al-Muwatta` and then says: “The matter is settled unanimously in our view that if the buyer stipulates the wealth of the slave then it belongs to him, whether this is cash or debt or goods, known or unknown. This applies even if the wealth owned by the slave is more than that with which he is purchased, and irrespective of whether the price is cash debts or goods.”(10) 2. The Hadith of Ibn Umar (may Allah be pleased with him) stating: “When a person buys a palm-grove after pollination, then the fruit is (9) Agreed upon by both Al-Bukhari and Muslim. The text of this Hadith belongs to AlBukhari: “Sahih Al-Bukhari”, Al-Bukhari”, “Kitab Al-Musaqat”, Al-Musaqat”, chapter: When the person has a right of way or right to water in an orchard or palm-grove (No. 2250); and “Sahih Muslim”, Muslim”, “Kitab Al-Buyu’”, Al-Buyu’”, chapter: When a person sells palm-grove with fruit (No. 1543). (10) See “Al-Muwatta’”. 577
7. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) for the seller, unless the buyer stipulates this too.”(11)The Hadith conveys the permissibility of an absolute stipulation on the part of the buyer for the fruit whether or not the fruit has begun to ripen despite the prohibition of the sale of fruit before it has begun to ripen, as is found in the Hadith of Jabir (may Allah be pleased with him)saying: “The Messenger of Allah (peace be upon him) forbade the sale of fruit before it has begun to ripen.”(12)As the fruit was secondary to the primary subject-matter, which was the palm-grove, it was overlooked when it would not be if it was the only subject-matter of the contract. 3. Among the established principles of Fiqh according to the scholars is that the secondary is subservient. One who examines the various issues flowing from this principle, and the cases structured upon the principle, will find that these principles as a group convey the meaning that the secondary thing will take the rule of the primary and will not be assigned a separate rule; it will come to be owned along with the ownership of the primary, and something that will not be overlooked separately will be overlooked when the thing is secondary. Among the cases derived from the rules are the following: a) The subservience of what has not begun to ripen to what has begun to ripen even when what is ripening is very little. It is stated in “Kashshaf Al-Qina’” as follows: “The ripening of some of the fruit of a tree in a garden is its ripening, that is, of the tree as well as the ripening of all that falls in this category in a single garden. … It becomes valid with what has begun to ripen as it is subsidiary to it.”(13) b) The sale of a house, whose roof is painted with gold, for gold, or is painted with silver for silver; the sale of a sword ornamented with gold for gold; the sale of milk for milk; or a thing made of wool for wool and so on. (11) Agreed upon by both Al-Bukhari and Muslim. The text of this Hadith belongs to AlBukhari: “Sahih Al-Bukhari”, Al-Bukhari”, “Kitab Al-Musaqat” Al-Musaqat”,, chapter: When the person has a right of way or right to water in an orchard or palm-grove (No. 2250); and “Sahih Muslim”, Muslim”, “Kitab Al-Buyu’”, Al-Buyu’”, chapter: When a person sells palm-grove with fruit (No. 1543). (12) Agreed upon by both Al-Bukhari and Muslim. (13) “Kashshaf Al-Qina’” [3: 287]; see also “Al-Mughni” [6: 156]. 578
8. Shari ’ah Standard No. (21): Financial Paper (Shares and Bonds) Issuance of Bonds ■ The basis for the impermissibility of issuing interest-bearing bonds is that they represent, in their customary nature, a loan and the meaning of a loan is applied to them in their nature according to the Shari’ah. As each loan that yields a benefit is Riba, and the issuance of bonds is based upon loans with interest, their issuance is prohibited according to the Shari’ah. Dealing in (Negotiation of) Bonds ■ The basis for the impermissibility of dealing in bonds is what has been settled with respect to their issuance due to their being based on Riba. The reason is that the word negotiation includes the meaning of continuity and the transfer of the bond from one hand to another bearing interest benefits. This means that the buyer of a bond continues to be a creditor of the issuing corporation and demands Riba for his debt. This is impermissible according to the Shari’ah, and all dealing leading to this is impermissible impermissible. 579