Stock Exchange & Islam

by Umar Vadillo

Why is a Stock Exchange share a void contract in Islam?

The best way to understand the Stock Exchange is to understand Islamic Law. Therefore we will first need to understand what the contract of Shirka is in Islamic Law. Briefly there are two types of business contracts in Islam one is called shirka and the other is called qirad.

The Contract of Shirka (Partnership)

Partnership is in its general meaning any association of persons who share the ownership of some goods. Therefore partnership requires co-ownership of some goods. And if these goods are invested in a business then we have the necessity of a business contract.

Co-ownership is called in Arabic 'Shirka Milk'. A business partnership is called in Arabic 'Shirka Akid'.

"Shirka, in its basic sense, signifies the conjunction of two or more estates, in such a manner that one of them is not distinguishable form the other. In the language of the Law, it signifies the union of two or more persons in one concern. The term 'shirka', however, is extended to the contracts, although there is no actual conjunction of states, because a contract is the cause of such conjunction." (The Hedaya by Al-Marginani (1), pp 217-31)

Shirka is lawful, because in the time of the Prophet, salallahu alayhi wa salaam, men were accustomed to have transactions in partnership, a practise which he upheld. Malik, in his "Al-Muwatta", said:

"The way of doing things among us is that there is no harm in partnership (ash-shirka), transferring responsibility to a deputy (at-tawliyah) and revocation (al-iqalah) when dealing with food and other things, whether or not possession was taken, when the transaction is with cash, and there is no profit, loss or deferment of its price. If profit, loss or deferment or the pricebform one of the two enters any of these transactions, it becomes a sale which is made halal, and made haram by what make sale haram, and it is not partnership, transference of responsibility
to a deputy, or revocation"

Shirka is of two kinds depending how they are originated: Shirka Milk, or partnership by the right of property, and Shirka Akid, or partnership by a business contract.

The one that we are interested in exploring is the business contract of shirka, therefore what is commonly called shirka Akid or business partnership

The most significant conditions are:

1.- The principle of takafu' (Proportionality)
The share of a partnership where all the partners work and put capital depends on the different amount of capital invested. If there is differences in capital among the partners but they all work the same then the lesser investor can be compensated for his extra work.

"I have heard from Malik that partnership is not permissible unless there exists a balance (takafu') in the capitals." (Sahnun, Mudawwana, 12: 41)

2.- The necessity to participate in the work A partnership assumes the participation of all its members in the actual work. An association in which all the work is assigned to one partner, while the other provides some necessary capital or equipment, but no work, is not a valid partnership. The non-working party is not entitled to any share of the income and can claim only the return of his investment and, if it happened to be in a form other than cash, some equitable rental fee for its use.

Surplus capital cannot be used as investment in a partnership without physically participating in the work of the business. So you cannot have a capitalist investing in the production made by other people. The only form of capitalist sleeping investor is a business loan or qirad. In a partnership all the partners have to work, they are all equally owners and therefore equally responsible.

I said: "What is your opinion of an arrangement in which I place a person in a stall and say to him: 'I will accept the goods and you will do the work on the condition that what ever God grants us will be shared between us equally?'" He said: "According to Malik, this is not permissible." (Sahnun, Mudawwana, 12: 41)

I said: "What is your opinion of a partnership between three people in which one provides the millstone, the other the house, and the other the work-animal, on the condition that the owner of the animal do all the work?" He said: "The entire proceeds of the work are to go to the owner of the animal who executes the work, and he is obligate to pay the rental fee for the millstones and house." I said: "Is this also the case even if he does not earn anything?" He said "Yes, even if he does not earn anything." (Sahnun, Mudawwana, 12: 45)

Ibn Qasim rejects the validity of a partnership based in cash only which stipulates that all the work be done by only one of the partners. He explains his rejection as follows:

"The basis for this is that according to Malik, a partnership is not permissible unless they combine in its work proportionally to their respective shares in the joint capital."(Sahnun,
Mudawwana, 12: 60)

The results are manifold: The first one is quite obvious which is that there can not be capitalist investors using their capital to benefit from the manufacturing work of other people without occupying themselves in the work. The second one is the fact that all the owners in a co-ownership can exercise their ownership with identical status independently of the share that
they may have over the business. Both principles show the fallacy of the Stock Exchange.

The establishment of the Stock Exchange is a result of the previous creation of a false concept of ownership. This false concept of ownership is based on what they call "majority ownership". On this basis you can be the owner of a company by contract despite not having any executive decision over your property. Ownership is declared in a piece of paper, but the same piece of paper guarantees that you cannot decide, therefore, you cannot own the property. This is the falsehood of this kind of contract. The contract of shareholding with majority ownership is according to Islamic Law not acceptable and is considered to be a form of cheating.

THE ESSENCE OF OWNERSHIP

Ownership is not just a document that says you are the owner of something. Ownership means you are entitled to and also capable of deciding how to dispose off your property. Otherwise you are not the owner. Decision over a property is the essence of ownership.

Ownership exists every time something is used or consumed, although ownership is legally regulated only when scarcity appears. There were no regulations for fishing in the sea, but as the fleets increased and the fish became scarce, the regulation of ownership became necessary. Everybody disposes freely of air to breath, but the use of the flight paths of the planes became regulated. Before the regulation, there was also ownership, because when a plane used a flight path nobody else could use it. There was effectively, ownership.

Therefore, explicitly regulated or not, ownership is intrinsically connected to the use of something. Ownership cannot be abolished as long as you make use of things. The use of something implies necessarily that a decision has been taken. Whoever made that decision effectively owned that property. He or they, have actually become the owners. Therefore, the entitled owner should be able to actually own , and whoever actually owns should be the entitled owner. This is preserved in the Islamic law.

In the light of this, we can say something very important : Ownership is always private, because the taking of decision is always private. Whether a collective party decides or an individual decides, decision remains a private phenomenon.

When ownership is exercised individually, there is no difficulty in understanding how the decision is made. But what happens when there is collective ownership? If they are all owners they must all own. Therefore, in Islamic law, the co-owners submit to these two principles.

1. All the co-owners have the same status of decision independently of their participation in the property.
2. The results of the business are shared among the co-owners in proportion to their participation in the business as established in the contract.

If the first condition is not fulfilled, then the co-owners are no longer owners, and someone is usurping the shared ownership. Islamic law demands that every time there is a commercial agreement between two or more, a contract must be written. This contract is what constitutes the private decision of the business. The business contract clearly defines in advance the nature of the business: who are the investors, who is the agent (if there is one), the quantity of the investment, the objective of the business, its duration and the sharing of its results.

Therefore, when you sign the contract, you know what you are participating in. When you invest, you know what you are investing in. Now, what you have in modern investment is an agreement which is not considered a contract within Islamic law. Rather, the investor lends the money to an unknown owner, to an unknown business, with no fixed duration, whose profits or dividends are decided by that unknown owner. This is all done under the falsehood of majority ownership.

THE FALSE CONCEPT OF "MAJORITY OWNERSHIP"

The false concept was brought about for the purpose of the creation of a mechanism of control and manipulation which ended up with the establishment of the stock exchange. It is based on the principle that whoever has a simple majority of the shares of a company owns the company. This system allows the control of great portions of the market by very few. For example: Mr Stone who owns 51% of company A has control of the company. If he uses the capital of company A to buy 51% of company B, he will have total control of company B although he owns only approximately 1/4 of its capital. If he then uses the capital of company B to buy 51% of company C, he will have total control of C, although he owns only 1/8 of the capital. Mr Stone can then buy a company D, E, F ... in the same way.

The false concept of "majority ownership" has enabled the usurping of the legal ownership of millions of minority co-owners. Through this procedure, Mr Stone has power over an enormous amount of capital that is not his. He can decide what the results, now called dividends, are. But dividends are not the same as the results of the business. The company must be liquidated in order to know the results of the business. The system of "majority ownership" makes these companies exist without results, without liquidation. Because the majority owner can decide how much is going to be reinvested and how much will be dividends, so you are tied to the company against your will. In Islamic Law, you cannot force any investor to reinvest without his approval.

The results therefore, must be completely shared, by the liquidation of a company after the period stipulated in the contract as the duration of the company. If they all agree to continue they can continue, if not, the company is liquidated to start again with a new contract. Thus ownership is always protected. The "majority ownership" system only protects the company owned by the majority owners, but does not protect the ownership of the rest of the co-owners.

SOME CONCLUSIONS

To own a piece of paper called a share of a company in the Stock Exchange and to co-own a company are two very different things. Essentialy when you buy a share you do not become an owner. What you are doing is lending your money to the unknown majority owners. The problem from the point of view of Islamic Contractual Law, is that you are deprived of the rights that belong to a loan contract: you do not know who are you lending to, you do not know what is going to be used for, you have no guarantees that your money will be returned at all. To call a share a contract of co-ownership is a deception. Acording to our Law, this kind of contract will be considered void.

The system of majority ownership is a simple system to control the wealth of others by very few. People involved in investment are used to trace company ownership through complicated pyramidical structures of control. The result is the deception of many for the benefit of few, a typical caracteristic of the capitalist ethos.

Contracts in which there are several co-owners are known and valid in Islam. All the co-owners are by definition owners. It implies they have the right to decide and liquidate their business as long as this is possible. In another article we can analyse how large investments, for example in order to build a bridge, can be acquired by selling shares in Islamic Law.

The understanding of Islamic Law cannot be done by simply using cosmetical remedies to the problems of the modern capitalist system. The Islamic Law can only be understood within the landscape of institutions and customes of the Muslims in a Dar al-Islam. The Islamic contracts can only make sense within these parameters. To try to understand the shirka contract in the context of the Stock Exchange as a given is fruitless. To understand the contract of Shirkat one has to be able to recreate the world of Islamic Markets, caravans, guilds, dinars and dirhams, Amirs, qadis, etc. Anything else may lead to a serious misunderstanding. Today we have to deal with people who think that anything other than capitalism is going back to the Middle Ages. This argument is repeatedly used by secular parties all over the Muslim world againts the Islamic movement. We, on the other hand, do not believe that the fulfilment of human history is a system of cheating and exploitation such as capitalism. Rather we believe that capitalism, the religion of usury, is doomed by the promise of Allah in His Qur'an. The future is with those who submit to Allah, not with the ignorant.

And there is no victory except by Allah.