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KembaraXtra–Islamic Finance–Islamic Capital Market – Shari’ah Recognition of Joint-Stock Companies and Secondary Market Trading
-Shari’ah recognises joint-stock companies as valid business entities
-A joint-stock company is formed when two or more legal persons participate in a business venture
-Each participant contributes capital to the company
-In return for financial contribution,the company issues share certificates,which represent ownership in the company
-These share certificates confirm the shareholder’s proportionate ownership rights in the company
-Shares issued by a joint-stock company are freely transferable
-Shareholders are allowed to sell their shares at any time
-Sale of shares leads to a transfer of ownership from one shareholder to another
-This transferability enables the existence of an active secondary market
-Shari’ah principles governing equity markets have shown flexibility in accepting modern financial concepts while preserving ethical foundations
-In this regard,the Organisation of Islamic Cooperation Islamic Fiqh Academy has approved the legitimacy of share companies
-In approving joint-stock companies,the Academy accepted two key Western legal concepts:
-Artificial personality:The company is treated as a separate legal entity distinct from its owners
-Limited liability:Shareholders’ financial liability is limited to the amount of capital they invested
-Secondary market trading is important because it provides liquidity
-Liquidity allows investors to buy and sell shares easily without locking in their funds
-An active secondary market increases the appeal and efficiency of equity markets
-From the traditional Islamic perspective,trade is permitted primarily in tangible assets,goods,and services
-However,Shari’ah also allows the trading of shares,as they represent ownership in real assets and productive businesses
-Trading is only permissible if the underlying business activities and financial practices are Shari’ah compliant
-Shari’ah strictly prohibits elements such as:
-Riba (interest)
-Maisir (gambling and games of chance)
-Gharar (excessive uncertainty and ambiguity)
-Key takeaway:Shari’ah recognises joint-stock companies and permits trading of shares in the secondary market,provided the business activities and financial structures comply with Islamic ethical and legal principles,thereby supporting liquidity,ownership transfer,and modern capital market functioning
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