The Status of the Stock Exchange

Category: Faith & Spirituality, Life & Society Topics: Economy Views: 5256

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An important question which Muslim economists face in these times is the status of the stock exchange. Is trading on the stock exchange haram? Is it really gambling as some people say? 

The stock exchange is a market place where shares are bought and sold. By buying the shares of a company, you, in fact, share in the business. Therefore, if there is nothing against Islam in the nature of the business, there is nothing wrong in being the shareholder of that business or in getting dividends on those shares. Similarly, if you sell the shares at any point of time owing to some reason and get capital gains thereby, the transaction and the profit are not wrong from the Islamic point of view. 

There are however situations when the activity in the stock exchange is clearly against good sense and the norms of ethics. There are certain transactions which are or can be detrimental to the interests of either party by causing damage or deception. Therefore, though the Shari'ah has not prohibited these transactions as such and though, in most cases, they can't really be termed as gambling, they are clearly against the spirit of Islam when they result in or are likely to result in damage or deception. That is why there is a principle of Islamic jurists that any transaction which causes or might cause darar or gharar (damage or deception) to either party should be prohibited by law. Where the law of the land does not deal with such transactions, it is up to the individual to decide whether or not the transaction will or may cause damage or deception to the other party. In case he is certain of such damage or deception, he should certainly avoid undertaking the transaction. Even in the case where there is a sufficient probability of darar or gharar, it is best to avoid the transaction as a Muslim knows that he will be held accountable on the Day of Judgment if his actions deceive someone or cause him damage. 

Furthermore, at the macro level such transactions can be detrimental to the economy when trading moves beyond mere buying and selling, that is when the buyer and the seller do not remain a buyer and a seller but become a 'bear' or a 'bull'. 

Ideally, the market price of a share should be related to the performance of the company. But the speculators (euphemistically called investors) manipulate the prices by artificially stimulating the demand and the supply of shares. Forward contracts are made and further contracts are derived (financial derivatives) on that basis. The result is that the whole market activity is based on speculation rather than being based on entrepreneurship. The share price of a company doing perfectly well suddenly falls and that of a company in trouble suddenly rises. A person earns millions and loses millions in a day in this game. Obviously, such fluctuations have a negative impact on the economy, which is usually borne by the not-so-affluent sections of the society. One of the worst cases of such speculation was when on Oct. 19, 1987 -- now known as the Black Monday -- Wall Street crashed owing to the panic that had spread among the investors. Billions are lost in a day in such crashes. Since shares are sometimes bought and sold even before they have been actually bought and sold and, quite frequently, are bought primarily on the basis of borrowed capital (as in the case of the famous Australian investor Alan Bond), stakes are high and the slightest fear can start a chain reaction, which may result in a major catastrophe. The reason for such timorousness is nothing except that the whole economic activity in these exchanges is based on speculation and interest based borrowing rather than on entrepreneurship and equity participation. When such a large area of economic activity is based on speculation and interest based borrowing, the spirit of entrepreneurship suffers and moral corruption pervades the society. 

Economic activity should be based on entrepreneurship, hard work, creativity, moral principles and concern for others, whereas speculation is often detrimental to these values. An individual should also keep in mind the effect of his personal decisions on the whole society, and as its responsible member and as a good Muslim try to be part of the solution instead of being part of the problem. 

It has been seen that involvement in speculation often leads to greed and avarice, which come in the way of ethics and concern for society*, whereas a Muslim prefers sticking to nobler values even if they afford him less material benefit. Even in the absence of specific Divine injunctions or enacted laws, a Muslim should ask his own self whether his involvement in such activities is leading him away from God and inclining him towards the violation of moral values and ethics. And this is a question which an individual must answer himself. The rule here is sal nafsak (ask your soul). A Muslim's life should marked by love of God, fear of His wrath, charity and concern for others. Losing these values for material benefit is a trade that a good Muslim never likes to make.** 

*. The following words of a famous economist bear witness to this reality: 'For at least another hundred years, we must pretend to ourselves and to everyone that fair is foul and foul is fair, for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still.' (Keynes, Economic Possibilities for Our Grandchildren) 
**. It must also be remembered that in consideration of the way Allah Almighty revealed His laws through the Prophet (sws) and the way the Prophet (sws) implemented them, the State or an individual, in the desire to implement and follow Divine laws, should not hasten so much that an unnatural burden is put on one who is trying for his or her spiritual development. The approach of moving gradually towards the target is consistent with the spirit of Islam. Shari'ah is not difficult. It is not the purpose of Shari'ah to make life unnecessarily difficult for a person. Its purpose is to purify his or her soul. One should not try to make following the Shari'ah unnecessarily difficult, especially in areas which it does not directly touch upon and in areas where there is a certainty or risk that not using the allowances given by the Shari'ah or those that common sense points out will result in such burden as would result in greater evil than the one that is to be rooted out. 

  Category: Faith & Spirituality, Life & Society
  Topics: Economy
Views: 5256

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Older Comments:
one should also recognize that as muslims we are not allowed to trade in those things which are haram ie alcohol. futher one should study company accounts with due care and attention as some companies chose not only to invest through trade but by also profiteering from interest (Riba)which of course is also haram. companies often chose to do this when investment is not likely to be more profitable than simply leaving money in accounts to reap the interest. study company account carefully to see where money is comming in from in the business.

study the way in which companies do business, and how to read company accounts before trading.

may Allah guide you and bless your earnings.

Really this article is very helpful most especially in the current trend on our mordern business which rooted from un Islamic and Godly world, as we witness here most especially in Nigeria where you found very respectable Ulama trying to justify and legalised unlaful transaction such as bank interest and other thin inorder to suite there Master in the corridor of power. May Allah Continue in Protecting his deen.

hello i read this artical i am happy the dount in my mind is v can trade in stocks & shares
but sa trader v dont trade in banking sector whoes growth is related 2 bank & distellearies which is aslo related to alcohalic business & hotel industries which is aslo related to not so good things wher wine is also sold &lot more thing like also which thr our morel obligatins &understansding v think it might be not permited in islam rather our consioes doe not permit us to invest in thsi sectore

Since there is no consensus of the ulama regarding the status of stock exchange, it is advisable for us to refrian from this activities to ensure that we are in the safe side. I believe that there is uncoutable ways to raise our wealth in Islam which is 100% halal.All the long life predetermined rizq that is allocated by Allah to us must be halal, so why go for something that is ambigous?