Chapter 5: Answers to Commonly Asked Questions

Trading in stocks

Q: Is trading in stocks permissible, or is it forbidden "speculation" or gambling?

A: There is a difference between speculation and gambling. Every trade involves speculation: the purchased goods may go up or down in price. As explained in Chapter 3, common shares in a company provide the holder a claim to some portion of that company's assets, and a corresponding claim to its profits. As long as the company's business and financial position are acceptable, there is no reason to believe that trading in the company's shares is not permissible.

Speculation in productive trade and investment creates value for society; and therefore cannot be equated to gambling. In pure gambling, money changes hands based on chance, without any underlying productive activity taking place. On the other hand, trading in the shares of companies, with potential profits derived from productive economic, activities, allows capital flows to allocate investments as productively as possible. Of course, if a business's primary activity is deemed unproductive (e.g. a casino, or a beer brewery), then Muslims will not be permitted to own shares in that company since owning such shares constitutes an implicit participation in the business's activity. There are a number of issues involved in determining which companies' shares are "permissible" for Muslims. Please refer to Chapter 3 for more details.

Q: How about "day trading'"? Shouldn't Islamic investment be "long term" rather than "speculative"?

A: I repeat the above distinction between productive speculation which is at the very heart of all permitted (and encouraged) trading on the one hand, and forbidden gambling on the other. It is possible for careless individuals to approach the stock market as a gambling casino, but it is also possible for such individuals to use any other market in the same manner. Following a "buy low and sell high" strategy is at the heart of all profitable trading, including the caravan trades in which the Prophet (pbuh) participated. If a profitable opportunity presents itself sooner than anticipated, a, good merchant or investor would be criticized for foregoing such profits. Whether or not speculation amounts to gambling depends on the intentions of the trader, and the nature of the traded goods.

Assuming that intentions are good, and the proper screening of securities is observed, we must now turn to the issue of whether "day trading", where the investor intends to liquidate all positions at the end of each day, is particularly close to gambling as compared to other investment strategies. There is no reason to believe that the term of the trading activities influences whether or not it is considered gambling. Tradition has it that `Abdul Rahman ibn `Awf (mAbpwh) reached Madinah without any wealth (having left it all in Makkah), went to the market with an axe, and returned at the end of the day with a small fortune. His abilities to amass wealth were legendary, but that did not reduce his religious status, as he was one of the shura group to nominate the Khalifah, and he was one of the ten companions of the Prophet (pbuh) to receive glad tidings of admission into paradise.

That being said, one must comment from the financial point of view that most day trading is for lack of a better term stupid wasting of talent and wealth. While a few professional traders may be sufficiently skilled to make modest profits on average in day trading, the vast majority of those who engage in this activity are amateurs attracted by irresponsible advertisement that over emphasizes a few large profits made by some lucky individuals. The fact of the matter is that for most day traders, they lose money on average, with very few making large profits out of sheer luck of making the right trades at the right time. Approached in this manner, it is definitely gambling. Viewed as gambling, most individuals will have better odds at a Las Vegas casino. If day trading is approached in this manner, it wastes the trader's time in non productive activities relative to his or her main professional career, and wastes his or her wealth. While "day trading" per se may not be easily condemned as haram, waste of time and talent certainly may be condemned thus.

Interest on bank deposits

Q: There have been some "fatwas" in recent years permitting bank interest. Can we collect interest on our bank deposits? If not, what can we do?

A: There have indeed been some such "fatwas", especially by Egyptian muftis. However, the vast majority of jurists, today and in the past, disagree with those expressed opinions. Intellectual honesty dictates that we should present both the minority and the majority opinions. The most famous of the minority fatwas, that of Dr. Tantawi, was characterized by the Federal Shariat Court of Pakistan in Judgment on Interest (Riba), Lahore Lawyers' Book Club. 1992, as the "solitary opinion of Shaykh Tantawi of Egypt". It is also worthwhile noting that the timing of this and later fatwas coincided with a political backlash against a series of financial scandals for Egyptian savings and loans operations that had characterized themselves as "Islamic". The politics behind those fatwas do not concern us in this guide. We care primarily about the religious merits of the minority opinion against the opinions of the majority of jurists around the world, including at AI Azhar.

Dr. `Abd Al Mun'im Al Nimr, an ex Minister of 'Awqaf in Egypt, wrote an article in Al 'Ahrdm (June 1, 1989), in which he argued that the reason for the prohibition of Riba (which he argued to be the harm caused to the debtor) does not apply to deposits with banks. Therefore, he argued, bank interest was not the forbidden Riba. The past mufti of Egypt, and current Shaykhu Al 'Azhar, Dr. Muhammad Sayyid Tantawi, issued a fatwa (Al 'Ahram, 12 July 1989; November 1989) permitting certain forms of interest, and in a series of five fatwas in the same newspapers in May 1991, he permitted all banking interest. The current Egyptian mufti, Sh. Nasr Farid Wasil, reiterated this opinion in the U.A.E. daily paper Al Ittihdd, August 22, 1997: "I will give you a final and decisive ruling (fatwa)... So long as banks invest the money in permissible venues (halal), then the transaction is permissible (halal)... The issue is an investment from money. Otherwise, it is forbidden (haram)... there is no such thing as an Islamic or non Islamic bank. So let us stop this controversy about bank interest".

Those fatwas have been published, and ignoring or denying their existence is not the solution. We only point out that those new rulings contradict many earlier and contemporaneous ones. For instance, the 'Azhar's own Research Council ruled as follows in 1965:

Interest on all types of loans is forbidden Riba. There is no difference in this regard between so called consumption and production loans. Moreover, Riba is forbidden (haram) in small as well as large quantities, whether it is effected through tune deposits, demand (or checking) deposits, or any interest bearing loan contract. All such dealings are among the forbidden Riba.

Many similar rulings and fatwas forbidding banking interest have been issued by different Fiqh Councils around the world. [Note: The Arabic reader is referred to the books of Dr. Muhammad 'Al i Al Saliis, in which he lists many prohibiting fatwas and debunks the foundations of those recent permitting fatwas (e.g. Al Salus (1998, vol.l)).] Moreover, earlier Muftis of Egypt have ruled of the prohibition. Thus Sh. Jad Al Haqq `Ali Jad Al Haqq, who served both as mufti and as Shaykhu Al 'Azhar ruled in his hook Al Fatawa Al 'Islamiyyah:

Depositing monies to collect a fixed rate of interest is forbidden in Islam, and borrowing with interest from government institutions or banks is forbidden Riba.

In this regard, it has long been established that deposits (e.g. with a bank) become loans as soon as they are used by the recipient of the deposit. Thus, Jordanian civil law (item 889) stated: "if the deposited item was an amount of money or something which perishes by usage, and if the depositor allows the recipient to use the deposited items, then the contract is considered a loan contract". In loan contracts, any increase, as we have seen, is forbidden Riba.

Therefore, the vast majority of ,jurists (including those of Al 'Azhar in Egypt) rule that bank deposits are loans, and that the interest incurred on them is forbidden Riba. However, if the question is asked: "assume that the interest has already been accumulated, what would the Muslim do with it?"". An answer was provided by The Islamic Fiqh Council in Makkah (19 20 Rajab 1406 A.H./1985 C.E.):

All income collected through Riba interest is forbidden property (~ JU), and the Muslim may not use it for any personal benefit. Such money must be spent on infrastructure projects such as schools, hospitals, etc. to benefit Muslims. Such spending is not considered charity, but it is a form of purification from the haram component. It is not permitted for the Muslim to leave the interest monies with the bank, since that would benefit the banks, especially if they are non Muslim and foreign banks that may use such funds against Islam and Muslims directly or indirectly. This is being said with the full understanding that continuing dealings with Riba based banks, with or without interest, is not permitted.

This same opinion was given earlier by the Fatwa Committee of Al'Azhar in the 1960s with regards to deposits with foreign banks which were necessary to facilitate international trade.


Q: If I lend someone $10 for 10 years, how can it be fair for him to return to me the same $10 when that amount of money buys a lot less than it did 10 years earlier?

A: There is a continued fundamental misunderstanding among many Muslims about the legal status of loans in Islamic Jurisprudence. This confusion gives rise to questions regarding how to deal with inflation, and to faulty suggestions for how to build an Islamic banking system on "interest free loans"".

Lending in Islam is a charitable contract, which differs from sales contracts in three fundamental ways (c.f. Al Qarafi, Al Furuq, beginning of vol.4)

  1. Loans may be conducted with ribawi goods (those measured by weight or volume for the Hanafis, monetary numeraires and foodstuffs for the Malikis, Shafi'is, and Hanbalis). Since a ribawi good is exchanged for an equal amount of that ribawi good in a loan, this would constitute "Riba al nasa" Thus, this is permitted in loans but forbidden in sales.
  2. For non ribawi goods, a loan may result in exchanging a known good for an unknown compensation later to be accepted. This is forbidden in sales but permitted in loans.
  3. For a loan of fungibles, the equivalent sale would include the forbidden sale of what one does not have. However, this third rule is also relaxed for loans.

Al Qarafi proceeds to explain that those rules are relaxed in loans since the loan is primarily a. charitable contract. According to Al Shirazi in Al Muhadhdhab (vol.1), and Ibn Qudamah in Al Mughni (vol.4, p.313), it is narrated that 'Abu Al Darda' (mAbpwh) said: "I prefer to lend two Dinars, get them back, and lend them out again, to giving them away in charity", and Ibn Mas'ud and Ibn 'Abbas are narrated to have said "two loans are better than one charitable payment".

Another fundamental difference between lending and financing methods is that the lender has the right to request repayment of the loan at any point in tune. If the debtor is capable of paying, he Must do so (ibid). Therefore; any form of loan, "interest free" or otherwise, is unsuitable as a basis for any form of finance!

Therefore, the loan contract is a form of charity since the lender is giving away the usufruct of the lent money or goods for the period of the loan. This charitable contribution includes the "time value" of that money or good. If that time value is higher due to inflation, then the lender has given a larger charity. Notice that if the debtor cannot pay (as per the verses of Riba in Surat Al Baqarah [2]), the creditor must give him extensions until he is able. In fact the debtor may never be able to pay back, in which case the entire lent sum is considered charity.

In a recent ruling, the Fiqh Academy of the Organization of the Islamic Conference, in a Seminar on indexation held in Bahrain (September 22 23, 1999) distinguished between two cases: whether or not the inflation was anticipated. If the inflation was anticipated, then the reduced purchasing power of the lent money was indeed paid charity, and the lender may not demand any compensation. In the case where the inflation was not anticipated, the Academy recommended resorting to arbitration. If arbitration was not possible, the Academy devised rules of compensation depending on whether the loss due to inflation was major (over 33%) or minor (less than 33%). The arbitrariness of this rule is quite apparent, especially since this rule could not possibly be adequate independently of the term of the loan!

Most interesting, however, is the fact that the Academy categorically ruled out as strictly forbidden the commonly suggested solution of indexation of a lent amount of money to cost of living, interest rates, GNP growth rates, the price of gold or some other commodity, etc. Of course, that opinion by the Academy does not rule out the possibility of lending gold instead of dollars, if the latter indexation was desired.

The best way to summarize the status of lending and Riba in Islam is this:

In Islam, one does not lend to make money, and one does not borrow to finance business. [Note: Of course, the second part of this slogan is not based on a religious prohibition. However, since the lender is not entitled to any part of the profits of the investor, he would only be exposed to the negative possibility of losses without a corresponding potential for gains. This is not a good or sustainable way to finance business.]

Loans are a charitable contract, and therefore if inflation causes the lender to lose more than he anticipated (with or without the OIC Fiqh Academy's compensation scheme), then the charitable part of the loan is larger. Demanding compensation for such an increase in charity would be unwise and insolent in Islam, since only Allah can and will determine the appropriate reward. If the purpose of extending the loan was making profits or engaging in a business project, then the parties should not have selected the loan contract as the vehicle for such transactions. Please review Chapter 2 for a. summary of appropriate contracts that are intended for such purposes.

What is the difference?

Q: It seems to me that all you're doing is re labeling interest as "rent" or "profit", but dollar for dollar, I don't see any difference between what you call an Islamic contract and what is done by banks and mortgage companies.

A: Islamic law puts many restrictions on contracts to attain maximal justice in financial transaction, minimize the potential for legal disputes, and build a healthy and stable financial and economic system. Of course, all those goals are shared by secular governments as well, and they utilize their best human effort to attain them. The fact that there is a great deal of similarity between the two systems should therefore come as no surprise. To draw an analogy, many rational non Muslims share the Muslims' recognition of the evils of intoxicants and drugs, and attempt to avoid them in the same manner.

The fundamental difference from a. legal point of view is the central role of Revelation in Islamic Law. Islamic jurists, like legal experts of other system, exercised and continue to exercise their best Judgment in light of the extant body of Islamic Law. The main difference is the general rule: "no ruling based on legal reasoning is allowed where a ruling exists in a. Legal Text (Mass) [in the Qur'an or Hadithl"] Therefore, the fine legal distinctions between Islamic ,jurisprudence and man made laws will normally be based on the existence of a Canonical Legal Text (Nass).

Obviously, the great Islamic legal scholars of the past rarely, if ever, wrote extensive discussions to justify legal injunctions that are directly derivable from a Nass. Such justification would not change the applicability of the law, and may be harmful if later proven wrong. [Note: A case in point is the wrong justification of the prohibition of riba purely on the grounds of preventing exploitation. See footnote 1 of Ch. 1 for a reference.]

On the other hand, we have very few glimpses of the legal understanding of those scholars when they discussed how to generalize the implications of a Legal Nass. One very illuminating instance is provided by 'Ibn Rushd (1997, vol.3,pp.183 184). When discussing the different generalizations of the prohibition of Riba in the six commodities (gold, silver, dates, wheat, barley, salt) mentioned in the first referenced Hadith, 'Ibn Rushd reasoned as follows:

"It is thus apparent from the law that what is intended by the prohibition of Riba is what it contains of excessive injustice (ghubn fahish). In this regard, justice in transactions is achieved by approaching equality. Since the attainment of such equality in items of different kinds is difficult, their values are determined instead in monetary terms (with the Dirham, and the. Dinar). For things which are not measured by weight and volume, justice can be determined by means of proportionality. I mean, the ratio between the value of one item to its kind should be equal to the ratio of the value of the other item to its kind. For example, if a person sells a horse in exchange for clothes, justice is attained by making the ratio of the price of the horse to other horses the same as the ratio of the price of the clothes (for which it is traded, tr.1 to other clothes. Thus, if the value of the horse is fifty, the value of the clothes should be fifty. [If each piece of clothing's value is five, then the horse should be exchanged for 10 pieces of clothing.

"As for [fungible] goods measured by volume or weight, they are relatively homogenous, and thus have similar benefits [utilities]. Since it is not necessary for a person owning one type of those goods to exchange it for the exact same type, justice in this case is achieved by equating volume or weight since the benefits [utilities] are very similar..."

This quote cannot be treated fully in this short guide. [Note: For a fuller economic analysis, see my paper "An Economic Explication of the Prohibition of Riba in Classical Islamic Jurisprudence", available on the web at .] However, the reader can immediately see one major difference between the finance payments in an Islamic contract and those in a Riba based contract.

The "equality" of compensations, which 'Ibn Rushd lists as the fundamental reason for prohibiting Riba, guarantees a certain degree of marking to market in an Islamic financial contract. For instance, if a home, purchase is financed through an Islamic lease purchase or diminishing partnership, there is a "rental" payment in place of the "interest" payment in a conventional mortgage. This distinction is not simply verbal window dressing. The going market rent for similar properties in similar areas can be used as a benchmark to gauge the appropriate financing charges.

Of course, as we have seen previously, the interest payments in a conventional mortgage may just happen to be exactly equal to the rent component in an Islamic contract. Even if the conventional mortgage contract had agreed with all the other Islamic 'ijarah or sharika requirements enumerated by the jurists (it does not!) this would not mean that using the latter is mere window dressing. The Islamic contract forces the two parties to link the finance charges to a specific tangible asset, and thus forces comparison (if not equalization) with the time value of money invested in that asset. [Note: Those educated in contemporary economics and finance will recognize the importance of this rule in effecting desirable economic efficiency and fairness.] It also enforces all the other legal conditions associated with the lease purchase or declining partnership contract.

The fundamental difference between the two cases cannot be overemphasized. From a religious point of view, writing a contract that intentionally abides by Islamic Legal injunctions is very different from writing one which does so by mere coincidence or based on human reasoning. Moreover, from a legal and practical point of view, the first contract is guaranteed to continue to abide by Islamic Law, while the latter may change with circumstances. Such change can impose a significant cost on the Muslim who has to seek refinancing to abandon Riba and live in accordance with the Shari`a.