What Is the Islamic Guideline of Investments?
Islamic law encompasses all elements of a person's life, including economics, finance, law, politics, government, and its constituent elements, as well as social, ethical, and religious dimensions, such as morals and social justice.
Since Islam regulates every area of a believer's public and private interests, Shariah has already laid down the groundwork for stock market regulations and principles. Qualified jurists must extrapolate these principles, develop applicable judgments based on them, and apply them to market-specific circumstances, just as they must do in other areas of Shariah.
In the perspective of Shariah, legitimacy will always be subject to two main requirements: First, instead of a fixed return tied to their face value, they must conduct a pro-rated profit made by the Fund. Thus, neither the principal nor the profit rate (which is tied up to the principal) can be assured. Subscribers should join the fund with the knowledge that the return on their investment is linked to the Fund's real profit or loss. If the fund makes a lot of money, the return on their investment will increase accordingly. However, if the fund loses money, they will have to share it as well, unless the loss is caused by negligence or poor management, in which case the management, and not the fund, will be liable to compensate it. Second, the funds must be put into a Shariah-compliance business. It implies that not only the investment channels but also the terms agreed with them must comply with Islamic principles.
Moreover, Shariah offers a few rules for the nature of trade, with a focus on Islamic values and social well-being. The primary business must be permitted (halal) in accordance with Islamic laws. There are numerous businesses that engage in totally prohibited (haram) activities, such as the manufacture, sale, or provision of alcoholic beverages, haram meat such as pork, or immoral services such as gambling and betting, discos, prostitution, night clubs, and pornography. Shariah prohibits Muslims from investing in these firms or firms with a primary source of income that is based on these activities. Besides that, any form of riba (usury and interest) is severely forbidden in Islam. Trade is acceptable, but riba is prohibited, according to Allah. In addition to this restriction, Muhammad (PBUH), the final prophet, cursed the practice of receiving and giving interest. According to Islamic principles, it is forbidden to have investments in firms that are linked to riba or interest, either directly or indirectly. Firms that provide interest-based financial services, such as interest-based banks, insurance companies, finance, and leasing companies, are likewise prohibited.
In Shariah, qimar (gambling) is definitely forbidden. There are two types of gambling: one is simply trying to invest with the idea of being lucky based on excessive risk, similar to how one would spend money in general gambling, and the other is attempting to gain extra or abnormal profit by manipulating the price in any way possible, such as forming a syndicate and spreading rumors. This concept also contains unusual, irrational, manipulative, and immoral stock market speculation, which refers to stock market trading just for short-term profits, resulting in market uncertainty and certain losses, or longer-term positioning of the share for others. The pattern of transaction and its form differs among markets as well as among Islamic jurists. Margin trading, derivatives options, and futures trading, and short-selling are all options available in the stock market. Markets, traditional laws, and Islamic scholars all disagree on the legality of these issues. They are prohibited in many markets due to their involvement in market manipulation and speculations, as well as their interest and speculations. According to Osmani and Abdullah in their article entitled “Towards an Islamic Stock Market,” many Islamic jurists disagree on the validity of forwards, futures, and options because the sold commodity and payment of the price are made at a date in the future, leading in gharar (uncertainty) and gambling. Gharar or selling something you do not own or cannot be described in detail in terms of type, size, or amount, is prohibited by the Shariah.
On the other hand, the Shariah Advisory Council (SAC) decided during its tenth and eleventh meetings, while examining crude palm oil futures, they stated that speculating is acceptable under Shariah rules. Multiple arguments have been made in justification of the speculation's legality. According to SAC, speculation and gambling are considered to be identical in practice. As such, we do hear, for example, the exhortation not to treat the share market as a casino. This perception arises because, like gamblers, speculators join the market merely on the basis of luck. The stock market, on the other hand, is not a platform to gamble. It is a platform where shareholders can trade their stock to other investors in order to acquire liquidity. The way investors join and exit the market, as well as their motivations, determine whether it is gambling or not. As a result, it may be stated that the baseline of speculation under the Shariah rule is based on the investors' intention or behavior. The decisions should not be dependent on uncertainty or excessive risk, but rather on fundamental analysis and the objective of making a fair profit from the market.
In conclusion, Shariah compliance and conventional investment are different because they need to fulfill many requirements as stated above, and several more. Shariah-compliant funds are investment tools that follow the concepts of Shariah and the Muslim religion's fundamental principles. It is considered to be a kind of socially responsible investing. It is critical for any Muslim investor to ensure that his or her earnings are Shariah-compliant. Shariah compliance also covers income acquired through various investments, in addition to wages and money acquired from the business.
Ahmad, N.W., Ripain, N., Noor, N.H.N.M. 2014. Investment in Stock Market: A Review on Islamic Perspectives, E-proceedings of the Conference on Management and Muamalah (CoMM 2014), 26-27 May, Kolej Universiti Islam Antarabangsa Selangor (KUIS), Kajang, Malaysia.
Asutay, M. 2007. Growth and Current Evolution of the Islamic Financial Industry, International Workshop on Islamic Economics: Theoretical and Practical Perspectives in a Global Context. Takushoku University, Tokyo, Japan, 21 July.
Chapra, M. U. 1985. Towards a Just Monetary System, The Islamic Foundation: Licester.
Mufti Taqi Usmani, Principles of Shariah Governing Islamic Investment Funds, Retrieved 27th May 2021.
Osmani, N.M. & Abdullah, M. F. 2009. Towards An Islamic Stock Market: A review of Classical and Modern Literatures, International Review of Business Research Papers, 5(5), 121‐130.
Tag el-Din, S. and Hassan, M. K. 2007. “Islam and speculation in the stock exchange”, in Kabir Hassan, M. and Lewis, M. (Eds), Handbook of Islamic Banking, Chapter 15, Edward Elgar Publishing Company, London.
Ahmad Tarmizi Bin Abdul Rahman is a 3rd Year Student of Actuarial Science at the Universiti Sains Islam, Malaysia.
Topics: Economic Development, Finance, Islamic Finance, Islamic Law (Sharia)