Is it really halal to invest in stocks?

One of the most common questions I am asked is if it is really halal to invest in the stock markets.

How can investing in the stock market be permissible when companies are involved in some haraam or the other? They either take interest-based debts or have haraam earnings.

Tesla, for example, is also selling alcohol. Apple has started a “Savings” account.

According to the Shariah standards, it will be permissible to invest as long as the main business is halal and impure earnings are less than 5% of the total revenues.

But how sound is this? Let’s address the elephant in the room.

Unfortunately, the reality of the world we live in today is that most public companies are neither Muslim nor do they operate in an Islamic environment. Faith-based values are not prevalent.

Recognizing the challenges, reputed Islamic scholars from around the world used classical texts to derive rules, which became Shariah standards for investing in the stock markets.

AAOIFI is the most respected organization in this regard, setting the standard for Islamic finance around the world. It’s headed by senior scholars from several countries.

AAOIFI states in their Standard 21:

The basis for exempting trading in the shares of these corporations, whose primary activity is permissible, however, they deposit amounts and borrow on the basis of interest, is the application of the rule of removal of hardship and acknowledging of general need, widespread practice, the acknowledged principles of surplus, shortage and predominance, (5) as well as the permissibility of dealing with one the major part of whose wealth is permissible,(6) along with reliance upon the issue of separation of bargains according to some Jurists.(7) This is upheld by most fatwa issuing organisations as well as the Shari’ah Supervisory Boards of Islamic banks.(8)

The followinga are their references:
(5) “Al-Furuq” “Al-Furuq” by Al-Qarafi [4: 104]; “Al-Muwafaqat” [1: 37]; “Ahkam Al-Quran” “Ahkam Al-Quran” by Ibn Al-Arabi [4: 1804]; and “Qawa’id Al-Ahkam Fi Masalih Al-Anam” [1: 18, 41-45]
(6) “Badai’ Al-Sanai’” [4: 104]; “Al-Ashbah Wa Al-Nazair “Al-Ashbah Wa Al-Nazair by Ibn Nujaym (pp. 112-114); “Al-Bayan Wa Al-Tahsil” [18: 194-95]; and “Al-Manthur Fi Al-Qawa’id” “Al-Manthur Fi Al-Qawa’id” [2: 335].
(7) “Fath al-Qadir [6: 89-90]; “’Iqd Al-Jawahir Al-Thaminah” [3: 439]; “Al-Sharh Al-Kabir Ma’a Al-Dusuqi Ma’a Al-Dusuqi [3: 15]; “Al-Rawdah” [3: 420-25]; and “Majmu’ Al-Fatawa” [29: 48].
(8) Among these is Al Rajhi Organization in its resolution No. 48, 23/8/1422 A.H.

So if a company is in a halal business but has some haraam revenues, which are less than 5% of the total revenues, then it will be permissible to invest in it. There are other applicable rules as well (like debt and investments).

To explain this 5% rule, let’s take the example of the Islamic fiqh on purity of water. What if a small amount of impurity like blood or urine falls into a large body of water? Will it be okay to do wudhu with such water?

In Islamic fiqh, as long as the state of the water does not change, like its color or taste or smell, then the water is pure to use for wudhu or ghusl.

But if the impurity is big enough to change the characteristics of the water, then it will be impure to use.

These rulings and their underlying texts have been appled in today’s capital markets.

Normally, it would not be permissible for Muslims to invest in such a business. But these exemptions for the stock markets are in place due to the situation we find ourselves in. Otherwise, Muslims will be disadvantaged quite a bit and be unable to take part in the modern economy.

According to AAOIFI, the majority of fatwa organizations around the world have allowed such exemptions.

Alhamdulillah, Allah has provided us with a Shariah that has the provisions to adapt for different circumstances.

In sha Allah, as we get stronger and build more influence, the need for exemptions will slowly go away.

Imagine if practicing Muslims were building and running billion dollar public companies! What if the next Google or Amazon were built by Muslims who were also conscious of Islamic values. Our situation would be very different. Allah knows best.

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Picture of Faraz Omar, CSAA, MBA
Faraz Omar, CSAA, MBA
Founder of Muslim Xchange. MBA in Finance and AAOIFI Certified Shariah Advisor & Auditor (CSAA). Passionate about what we as Muslims can and must do for each other and the world in general.
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