Stock investments – Halal or Not?

Muslims make about a quarter of the world’s population today. With the advent of online trading platforms such as eToro, there is an emerging need to answer whether investing in Stocks and Shares is allowed under Islamic laws. This question demands a clear and validated response considering a variety of sources and scholarly viewpoints. In this blog, we will break down and analyse different options for Stocks, Forex, and Binary investments to provide Halal guidelines.

The social and economic lives of Muslims are governed by Islamic principles taught in ‘Quran’ and by the ‘Laws of Sharia’.  This pathway followed by all Muslims also teaches us how to keep black and white lines from merging or crossing over in terms of day trading. One serious point to ponder is the risk-sharing factor regulated by various rules like:

  • Bai’ al ‘inah for selling and buying-back agreement
  • Baisalam
  • Mudarabah for sharing of profit
  • Bai’ muajjal for selling credit
  • Bai’ bithamanajil for selling deferred payments
  • Murabahah
  • Musawamah

With all these rules to follow, we first have to figure out whether investing in Stock Exchange and Forex is considered Halal or Haram in Islam.

The widely accepted principle is that buying the stocks and shares is allowed in Islam on account that it merely means to gain ownership of a percentage of a business. But it is required to make sure the business dealings are conducted in an Islamic manner. Buying stock from businesses that deal in alcohol (Guinness) or promote gambling (Ladbrokes) is prohibited.

The companies selling their shares on Stock Exchange and Forex are divided into 3 classes as per Islamic teachings and laws:

Class 1 – Permissible Businesses

All business practices and transactions with companies in the following list may be considered Halal. These businesses and companies are called ‘clean’ as they are free of any cheating or borrowing of sums with riba (unjustified or unreasonable lending). Clothing, furniture, machinery and tools, manufacturing, medical equipment, property, shipping, supplies, etc are some of the permissible businesses.

Class 2 – Prohibited Businesses

All business practices and transactions in the following list of companies are prohibited and therefore Haram to engage with through the Stock market. Prohibited businesses include alcohol, banking on riba, insurance of commercial assets, hotels, nightclubs, pornography, tourism, etc.

Class 3 – Partly Permissible Businesses

All businesses are permissible if they do not engage in any prohibited business practices or transaction processes. For instance, the transportation business itself is permissible but prohibited if it is a party to practices like maintaining interest-based accounts or financing through riba loans, etc. These businesses are classified as ‘mixed’.

Should you invest in a company that does not agree entirely with Islamic laws?

The best course of action here would be to refrain from investing in shares to spare any form of doubt or uncertainty. But there is a middle ground where on following certain conditions stock trade remains Halal.

Purging the Profit Percentage

A majority of scholars concur that if only a small percentage, say, 5% of a company’s profits are made through prohibited businesses like alcohol, then that percentage of profit (5%) should be donated to some charity to purge the Haram portion.

Interest Trading – Halal or Haram

There is a lot of debate on interest trade’s status in Islam. Muslims are not allowed to take or benefit from interest. This means if £25 is invested then only £25 should be paid or received. But since the stock prices are hardly ever static, you inevitably have to pay above or below the actual value of the amount.

Solution for Interest Trading

With interest trading, it is easier to conform to Halal shares. The majority of scholars are in agreement that only companies that tie big chunks of stock share to big debts or cash are prohibited. Instead, companies that gain value from diverse businesses should be chosen. Common sense plays an important role here by rejecting companies leveraged heavily to deal in Haram businesses. This also means that the status of stock and interest trading being either Halal or partially or completely Haram is dependent on the concerning company and its rates of profit.

Currency Trading – Halal or Haram

Forex or currency trading offers fast withdrawal of money which makes it a tempting option. You may believe it is Halal on account of simply buying and then selling of money process but at its core, this can categorise as Haram. There are several issues about buying pounds with dollars and then selling them after some time at an appreciated value.

  • Leverage

Huge intraday profits are the goal here but for making substantial profits, larger sums have to be invested. If you do not have those sums your Forex broker may offer to leverage for you. This way, the broker encourages potential investors to spend, say, £50 for your actual £1. He loans you the additional money and you get to make greater profits by investing larger sums.

However, loans are only permissible in Islam if taken for Halal purposes such as investment in a business to gain profits, etc, and returned to the financer without any interest. But in case of the leverage, Forex brokers keep a commission on the money loaned. This commission is considered as an interest in the opinion of many scholars which renders Forex trading a Haram practice.

Solution for Leverage in Currency Trading

Luckily, several Forex brokers are now adopting Islamic practices and offer a viable solution. You may have a Forex account now free of standard interest charges. Instead higher rates for on-spot Forex trades are applied. This solution is, however; controversial as many scholars believe it satisfies no interest condition of Islam but some say it is a mere disguise, therefore, Haram. The brokers offering the ‘regular’ on-spot Forex trading service extended without any overnight charges will also nullify riba issues.

  • Status of By-Hand Exchange in Islam

After the interest issue, the exchange method issue takes over. Islam allows trading on the condition of by-hand exchange. Even the Holy Prophet (PBUH) provided guidelines for the exchange of commodities for commerce. But the technological evolution has eliminated the by-hand factor with e-commerce. Under these circumstances, what becomes of the hand-to-hand exchange condition?

Solution for By-Hand Exchange Condition

As a trade deal takes place between two parties i.e. a broker and a trade, it falls under the Halal proceedings. Furthermore, the scholars elaborate that the agreement and the exchange must happen at the same time in the meeting. This means that a trade should be proposed, accepted, and conducted in one sitting. Generally, this is how Forex trading operates which implies that it is, in fact, Halal. By the same logic, it dubs stop & limit orders as Haram.

  • Status of Ownership in Islam

To answer whether Forex trading is allowed in Islam, we must discuss the status of ownership. Since Forex trading is mainly based on speculating the worth of currencies in the future, we must clarify if it is Halal or not. The answer to this question is not black or white, and therefore, inquiring pertinent advice from your religious sect on the matter may be a pragmatic approach.

Solution for Ownership Issue

Islam recognises the value of improving lives through financial improvement. For this, the Islamic guidelines should be conferred, and choices weighed carefully to make the right decision that does not break any Islamic laws or crosses the boundaries of Halal and Haram. So, the answer to our question is religious as well as ethical. This means conducting Forex trading in the light of Islamic laws and via Halal Forex brokers is allowed.

Recommendation for Islamic Financial Trading

The one-quarter population of the planet needs options for clean Islamic financial investment and trading. It is high time they had a way to make it possible beyond the doubt of being involved in Haram practices. One such option is eToro. eToro provides clean Islamic accounts as a sustainable solution for financial trading purposes online. They offer assurance that with these Islamic accounts no dealing will fall under riba. The logistics for currency trading are complicated and require a lot of considerations of Fiqihs (jurisprudence). It has to fall under hand-to-hand exchange via concurrent proceedings but contemporary scholars are satisfied by the transaction receipts of banking.  To settle the matter discussed today, various fatwa’s have been issued which decree the following points to be practiced:

  • Simultaneous transaction for trade
  • The currencies should be transferred between buyer and seller accounts only
  • The trade agreement to money and goods transactions should be fulfilled right away
  • All trade should be interest-free. Any usurious interest will render the trade void as well as Haram

The Conclusion

The trade is Halal as much as the money permits or through the loan from a broker given that the broker does not take any commission on that loan as usurious interest.

Benefits of eToro –The Islamic Trading Account

  • No interest is applicable on contracts exceeding 24 hours.
  • No rollover commission is applicable on contracts exceeding 24 hours limit.
  • Totally interest-free leverage with Islamic accounts.
  • No administration charges for account management. eToro earns revenue explicitly from the spread which is the difference in buying and selling rates of an instrument.

If you do not have an eToro Islamic trading account, you can set up one here within a few clicks. Thanks to the eToro copy trading feature, you can now choose to copy trade Popular Investors like Irtiza Majeed and have your portfolio managed by industry experts for absolutely no cost.

This is not investment advice. As with all investing, your capital is at risk. Past performance is not a reliable indicator of future results.

Previous Post
What is Cryptocurrency?
Next Post
Why portfolio diversification is important?