. An example of a future contract in shares :
i) Two individuals, A and B enter into a contract on 1st January
1996 under which A would sell a share of company X at a price of $ 100
to B after an expiry of six months. B has an obligation to purchase at
this price irrespective of the market price on 31st june 1996.
ii) If the object of transaction is any commodity, or gold, or
silver, or currency and not share as in the above three cases, in that
way the validity or otherwise of the contract is affected?
Please note that the non-transferability of rights and obligations severely
limits the possibility of speculation on Futures Exch- anges. A commonly
held belief is that future contracts are prohibited when they are used
for speculation. Does this imply that futures contracts are permissible
when these are used for hedging?
A leading Islamic Bank's Annual report shows that the bank entered into
futures transaction for hedging its foreign currency risk. One view is
that such hedging may be justified in view of extreme volatility in currency
markets. (in my correspondence with a top executive of tha said bank,
I was given the reference of a book, Islamic Law and Finance by chibli
Mallat, I still do not have access to this book).
2. An example of an option contract in shares:
i) Two individuals, A and B enter into a contract on 1st January
1996 under which A grants a right to B without any oblig- ation on B's
part. B under the contract, gets a right to purchase a share of Company
X from A any time on or before 30th June 1996 at a price of $100 (irrespective
of the market price on the day of purchase). B, however, does not have
any obli- gation to purchase.
A accepts a consideration of $5 from B for granting him his right without
obligations. This is called a call option in shares.
ii) A and B enter into a contract on 1st January 1996 under which
A grants a right to B without any obligation on B's part. B, under the
contact, gets a right to sell a share of Company X to A at any time on
or before 30th June 1996 at a price of $100 (irrespective of the market
price on the day of purchase). B, however, does not have any obligation
to sell.
A accepts a consideration of $5 from B for granting him this right without
obligations. This is called a put option in shares.
iii) A and B enter into a contract on 1st January 1996 by which
A sells 100 shares of Company X at a price of $100 per share. The transaction
is settled with exchange of cash for the shares. A also grants a right
of B under which B can sell back the shares to A on the expirty of six
months, that is, 30th June 1996 at a price of $120 per share. This right
however, is cancelled if the price of the share increases beyond $120
and remains at that level for 21 consecutive days before 30th June 1996.
Unlike the previous two instances of transactions in pure options, the
above is a case of option as an additional feature of an equity sale and
purchase.
iv) If the object of transaction is any commodity, or gold, or
silver, or currency and not share as in the above three cases, in what
way the validity or otherwise of the contract is affected?
3. An example of an Islamic swap used by some Islamic banks:
Two banks enter into an agreement to exchange deposits for a period of
six months in different currencies on 1st January 1995 at the prevailing
exchange rate. Bank A exchanges Rupees 30 million with Bank B for US Dollars
one million, and the Rupee-Dollar exchange rate prevailing on the date
is 30:1. During these six months, each bank utilizes the depsites it recei-
ved at its own risk.bank. At the end of six months, Bank A pays back one
million dollars to bank B and receives Rupees 30 million from it irrespective
of the Rupee-Dollar exchange rate prevailing on June 30, 1995, for example,
the Rupee-dollar ex- change rate might have become 35:1 or 25:1 on June
30, 1995. Is this contract Islamically permissible?
4. Examples of direct and indirect investment in equity:
i) Company A raises funds by seling shares and interest-bearing
bonds and invests all funds in predominantly halaal and profitable activities.
Is it permissible to purchase shares of Company A for an individual?
ii) Company B raises all its funds by selling shares and invests
all its funds in shares of Company A above and similar com- panies. Is
it permissible for an individual to purchase shares of Company B?
iii) Company X sells financial securities on which it promises
dividends at a rate of 10 per sent on its total sales during the year.
Is it permissible to purchase these securities where dividends are paid
as a predetermined proportion of sales revenue and not profits?
Answers are as follows:
1. i) This is an example of a futures transaction. The future transactions
as in vogue in the stock and commodities markets today are not permissible
for two reasons: firstly, it is a well recognized principle of Shari'ah
that sale or purchase cannot be effected for a future date. Therefore,
all forward and futures transactions are invalid in Shari'ah. Secondly,
because in most of the futures transactions delivery of the commodities
or their possession is not intended. In most cases, the transactions end
up with the settlement of difference of prices only, which is not allowed
in Shari'ah.
More detailed discussion on the Shari'ah aspect to futures transactions
may be found in my Arabic book; "Discussions of Contemporary Juristic
Issues" under the heading "Futures Contracts in Commodities".
ii) As future transactions are not permissible, no rights or obligations
can emanate therefrom. Therefore, the question of transferring these rights
and obligations does not arise.
iii) Futures transactions, as explained earlier, are totally impermissible
regardless of their subject matter. Similarly, it makes no difference
whether these contracts are entered into for the purpose of speculation
or for the purpose of hedging.
2. i, ii, iv, & v.) According to the principles of Shari'ah
an option is a promise to sell or to purchase a thing at a specific price
within a specified period. Such a promise in itself is permissible and
is morally binding on the promisor. However, this promise cannot be the
subject matter of a sale or purchase. Therefore, the promisor cannot charge
the promise a fee for making such a promise.
Since the prevalent options transactions in the options market are based
on charging fees on these promises, they are not valid according to Shari'ah.
This ruling applies to all kinds of options, no matter whether they are
call options or put options. Similarly, it makes no difference if the
subject matter of the option sale is a commodity, gold or silver, or a
currency; and as the contract is invalid ab-initio, the same cannot be
transferred.
iii) This contract has two aspects; Firstly, if the option of selling
back the shares to A has been made a precondition of the original sale
transaction, the whole transactions will be invalid because, according
to Shari'ah, a sale transaction cannot acc- ept such a condition. Secondly,
if the option is an independent promise of this kind is permissible in
Shari'ah, it cannot serve the purpose of the option market.
3. It is one of the principles of Shari'ah that two financial transactions
cannot be tied up togather in the sense that entering into one transaction
is made precondition to entering into the second. Keeping this principle
in view, the swap transaction referred to in the question is not permissible
because the deposit of one million dollars has been made a precondition
for accepting the deposit of 30 million rupees, since both the parties
will used the deposits for their own benefit, they are termed in Shari'ah
as loans (Qardh) and not as trust (Wadee'ah). Therefore, advancing one
loans has been made a precondition for receiving another, which means
that two financial transactions are tied up together.
This is my initial opinion about this transaction. However, it needs further
study and research.
4. i) If Company A raises funds by issuing shares and interest
bearing bonds and invests all funds in predominantly Halaal and profitable
activities, the permissibility of purchasing shares of such a company
depends on four conditions:
a. All the business activities of the company should be Halaal.
b. The shares of such a company have to be purchased after it has
acquired tangible assets like machinery, buildings, raw materials or stock
in trade.
c. If it becomes evident from the income statements of the company
that a part of its income consists of interest given by the bank on its
deposits, that proportion of the dividend must be given in charity. For
example, if the total profit of the company is $100 and 5% of it has accrued
through interest received on bank deposits, then 5% of the dividend must
be given in charity.
d. The shareholder should express his disagreement over depositing
surplus funds in an interest bearing account and raising funds through
interest bearing loans. A preferable methode would be to object against
such interest bearing transactions in the annual general meeting of the
company.
If the four conditions are strictly fulfilled, it is hoped that purchasing
shares of such a company will be permissible in Shari'ah.
A possible objection which may be raised against this ruling would be
that because the company had raised a considerable amount of its funds
by issuing interest bearing bonds, a substantial part of its funds is
impure according to Shari'ah; therefore, it should not be permissible
to participate in such a business. This objection may be refuted on the
ground that althought taking and interest bearing loans will be committing
a sin. However, the amount so borrowed are treated by the Shari'ah as
their own. Although they will be liable to punishment in the Hereafter,
the money borrowed comes into their ownership and anything purchased by
that money will not be treated in Shari'ah as Haraam.
Therefore, if the capital raised by the company consists of some amounts
borrowed on interest, it will not render the whole capital impure.
ii) If the four conditions mentioned above are fulfilled it will
also be permissible to purchase the shares of company B which has invested
all its funds in the shares of company A.
iii) It is necessary for the permissibility of Musharakah that
the profits of the joint venture are distributed among the partners on
an agreed proportion of the actual profit and not in proportion to the
sales revenue. Therefore, it is not permis- sible to purchase the securiteis
issued by Company X.
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