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KembaraXtra–Islamic Finance–Islamic Capital Market – Characteristics of Islamic Equity
-Halal nature of business (core requirement):
-The primary characteristic of Islamic equity is that the core business activity must be halal
-Companies must not be involved in prohibited (haram) activities such as:
– Gambling (maisir)
– Alcohol production or sale
– Interest-based financial dealings (riba)
– Excessive uncertainty or speculation (gharar)
-Practical challenge of full Shari’ah compliance:
-In modern economies,it is extremely difficult to find companies that are 100% Shari’ah compliant in every operational aspect
-Many companies may have a halal core business but still engage marginally in interest-based financing or other non-permissible activities
-A very strict interpretation would drastically limit the universe of investable stocks
-Scholarly debate on partial non-compliance:
-Some Shari’ah scholars disapprove investing in companies with any non-permissible activities,as they believe shareholders indirectly endorse such practices
-Other scholars distinguish between joint-stock companies and partnerships
-In joint-stock companies,individual shareholders:
– Have limited control over management decisions
– Cannot directly influence day-to-day business conduct
-Therefore,non-compliant activities cannot always be fully attributed to shareholders
-Contemporary Shari’ah approach:
-Many scholars accept that partial non-compliance does not automatically render the entire company haram
-Shari’ah rulings on equities consider modern economic realities
-Regulators in well-developed markets clearly define acceptable thresholds
-Role of Shari’ah screening standards:
-Regulatory and index-based standards help determine compliance
-Examples include:
– Dow Jones Islamic Market Index (USA)
– Meezan Islamic Fund standards (Pakistan)
-Although these standards differ in stringency,the final list of compliant stocks is usually similar
-Shari’ah compliance beyond business activity:
-Compliance is not limited to what the company does,but also how funds are structured
-Financial products must align with Shari’ah-approved contracts and principles
-This includes:
– Proper structuring
– Shari’ah endorsement
– Formal certification by Shari’ah boards
-Profit-and-loss sharing principle:
-Islamic equity does not allow fixed or guaranteed returns
-Profits must be shared on a pro rata basis
-No guarantee on capital or profit rate
-Returns are structured under mudarabah or musharaka contracts
-Asset composition and tradability of shares:
-Trading of shares depends on the nature of the company’s assets
-If assets are largely liquid (cash or receivables):
– Shares can only be traded at par value
-If assets include real and tangible assets:
– Shares may be traded at market value
-This ensures that share trading reflects ownership of real business activities
-Key Shari’ah principle on money:
-Money must function as a medium of exchange,not as a commodity
-Money itself cannot be traded for profit
-Returns must arise from real economic activity and asset ownership,not from money generating money
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