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KembaraXtra–Islamic Finance–Islamic Capital Market – Why Asset Composition Matters in Trading Islamic Shares
Simple Explanation:
In Islamic finance, shares represent ownership in a real business, not just ownership of money. Because of this, how a company’s assets are made up determines whether its shares can be freely traded at market prices or not.
Key Rule (In Simple Terms)
-If a company mostly owns real assets (factories,machines,buildings,inventory),its shares can be traded at any market price
-If a company mostly holds cash or receivables,its shares cannot be traded above or below face value (par value)
This rule exists because Islam does not allow money to be traded for profit.
Why This Rule Exists (Islamic Principle)
-Money in Islam is only a medium of exchange,not a commodity
-Making profit from money alone is considered riba
-Profit must come from real economic activity,such as:
– Selling goods
– Providing services
– Leasing assets
Example 1: Company with Real Assets (Trading Allowed at Market Price)
-A manufacturing company owns:
– Factories
– Machines
– Raw materials
– Finished goods
-Cash makes up only a small portion of its assets
👉 Its shares represent ownership in real productive assets
👉 Investors may buy and sell shares at market prices (higher or lower than face value)
Example:
-Face value of share: $1
-Market price: $3
✔ Permissible,because value comes from real business assets
Example 2: Company Holding Mostly Cash (Trading Restricted)
-A company holds:
– 90% cash
– 10% office equipment
👉 Buying its shares is essentially buying money
👉 Trading money at a premium or discount is not allowed in Islam
Example:
-Face value of share: $1
-Market price: $1.50 ❌ Not allowed
-Market price must remain at $1 (par value)
Key Takeaway
-Islamic share trading is ownership-based,not money-based
-Shares must reflect real assets and real business activity
-This ensures fairness,prevents riba,and links profit to productivity
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