Shares and debentures: Income from

Q596 :Companies normally issue to the public shares and debentures, with the aim of collecting funds to be invested in these companies and industries. When a person buys a number of these shares and debentures, he is an owner of a portion of the assets of the relevant company or industry. Every year the company announces dividends which represent shares in the profits made by the company. The dividends differ according to the performance in any particular year. The dividends paid for shares may vary a great deal, whereas the income of the debentures is called 'interest' which is fixed at the time of releasing the debentures to the public. This interest may vary according to the company or industry which issues them. I would like to ask whether the method of giving interest on debentures is the same as the old method of usury? Is it akin to the modern banking system? Is this type of interest or income permissible from the Islamic point of view? Are we, Muslims, allowed to buy such debentures and shares?

A596 : As you are well aware, the prohibition of usury is very strict in Islam. Indeed, Allah has booked some of the sternest warnings He demands to abandon all transactions of usury whatsoever, and to seek the return of their principal loans without asking for even the smallest portion over and above that principal. He told them that if they fail to respond to this order of abandoning usury, they should know that they are at war with Allah and with His messenger. Try as we may, we cannot describe, in our own words, the full significance of this warning. If human being is at war with Allah, that war will have only one result. If one resorts to usury in order to make some financial gains, enormous as they may be, he is actually earning that trifling gain at the expense of being at the wrong end of a battle with none other than Allah Himself. Needless to say, the result is absolute ruin for everyone who stands in the camp opposed to Allah. The companions of the Prophet have explained the practice of usury which was followed in Arabia before the advent of Islam. When a person borrows money from another, they specify a time for repayment. If the borrower cannot settle the loan at the specified time, he goes to the lender and ask him: "Would you agree to postpone settlement and I would pay you an extra sum?" This may happen several times, with each postponement meaning an increase in the amount to be repaid. It is universally agreed by all Muslim scholars, past and present that this type of transaction is usurious and absolutely forbidden. When you borrow a sum of money from a bank these days, the bank charges interest at a specified rate. The longer it takes you to repay the loan, the greater the total sum of interest you are paying. In this respect there is a great similarity between bank interest and usury as practiced in Arabia. Nevertheless, the interest charged or paid by bank is not exactly the same as usury. This is due to the fact that the bank operates a system of interest which works both ways. A person who deposits money with the bank receives interest on his deposit. When we look carefully at this transaction we find that the depositor is not in the position of a lender; nor is the bank in the position of a borrower. For these similarities, the majority of contemporary scholars subscribe to the view that bank interest is an offshoot of a usurious system and, as such, it is forbidden to Muslims. A debenture is a sealed bond of a corporation or a company acknowledging sum on which interest is due. It is thus an instrument showing the amount invested in the company, but this investment earns only interest which is declared at the beginning of the transaction. In this respect, it is closely similar to the bank interest which is paid on deposits. Hence, the same verdict applies to them. Thus, we cannot recommend any Muslim to buy any debentures in any industry or company. Buying shares in companies or industries, or buying 'unit trusts' is perfectly acceptable according to the system explained in the question. Shares earn a portion of the profit which is only declared at the end of the year, on the basis of the company's performance. Thus, the dividends declared may differ a great deal from one year to another. The risk of making very little profit or none at all, or indeed incurring loss is present all the time. What is necessary for a Muslim before he buys any shares is to make sure that the company in which he wants to invest by buying shares does not trade in anything forbidden. Thus, a Muslim may not buy the shares of a finance company which lends money at interest. Nor is he allowed to buy the shares of a brewery or a company that manufactures wines or intoxicating drinks, or tobacco or in a butcher's shop which sells pork. You should buy shares of companies which trade in legitimate articles only. Some banks have begun to operate invest schemes in which they take on themselves the responsibility of buying and selling shares on behalf of their clients. Such an investment is lawful from the Islamic point of view, if it can be guaranteed that the bank will only trade in the shares of companies whose business is legitimate and acceptable.

Our Dialogue ( Source : Arab News - Jeddah )