Islamic Investment

Introduction to Islamic Investment

Islam allows the sale and purchase of stocks as long as the transaction does not contradict the Shariah law. One thing for sure, as a Muslim we must avoid dealing in any financial transaction that involve Riba, Gharar (uncertainty) and Maysir (gambling). This is a clear cut Golden Rule (i.e. prohibition) that must be abide by all of us. Basically, investors who take up these shares are willing to bear the risk of losing their capital in exchange for securing higher returns. Investment in stocks is therefore a profit-sharing activity, which Islam rightly enjoins. Islamic or Shariah law therefore requires investors to participate in risk taking if they wish to earn profit. Apart from that, investment in stocks require the production process of the issuing company to be free from prohibitive elements of riba, gambling, intoxicants, pork an its derivatives.

Islamic investors, especially retailers (i.e. people like us, the white collar workers) are however not encourage to purchase and sell stocks for speculative purposes, since the business of speculation is not our line of work. Yes, in Islam, speculation is an everyday event. People whose life depends on trade and commerce speculate daily. That is why they buy goods at cost price, hoping and speculating to sell them at a higher price. Speculation in this sense is permissible in Islam. However, for normal people like us the practice of speculation may lead to gambling (maysir), because we are simply taking chances.

Therefore, stock purchase in Islam must be made on the basis of sound investigative system of stock valuation. This is the Tabi’ (nature’s way) dimension of Islamic stock investment. Investor must make a proper valuation of the company it intends to partner with i.e. they must make use of financial and company indicators in making decision to invest. Failure to do so may lead to losses and is like committing a sin, since the investor fails to uphold his role of a trustee of God-given bounty.

The basic principle of investment in Islam is that wealth belongs to God (Allah s.w.t.) and Man is entrusted i.e. given Amanah (trust), to look after it in the best manner possible on the basis of rules and regulation ordained by God. In doing so Man must not put wealth to waste by way of unwise investment decisions. He is expected to invest wealth in the most efficient manner. The Holy Prophet Muhammad s.a.w. once said “Whenever you make anything, pay special attention to its beauty and finesse.” On another occasion, the Prophet s.a.w. said “the best among you is he who when given a task, does it beautifully.”

Margin Financing

Again, since this column is about Islamic investment, I am not going to touch on conventional financing. Margin Financing is a transaction in which investor uses a loan to purchase shares using the latter as collateral. Under Islamic financing from some Islamic Banks, the issue of Margin Call arises when maintenance margin of 90% (or less) is breached. To me, this is quite an issue. Since the IPO financing is usually based on the contract of Bai’Inah i.e. buy and sell, therefore what is the justification for the bank to request from the client (i.e. ‘kutip hutang’) part of their selling price money when the stock price goes down?

Islam in a sense does not encourage people to borrow, especially when modern life today places a high value on the materials aspect of life and its wealth seeking-way. Seeking borrowed fund to purchase stocks is not the way one should strive to earn a living in Islam. There are many instances in historical Islam where the act of borrowing and lending for business is not encouraged at all. Muslims should stay away from debts as it brings many problems. Muslim customers should not be encouraged to borrow in order to invest in Islamic shares. Another Golden Rule in Financial Planning is ‘DO NOT BORROW TO INVEST’. Use your own money instead. If you don’t have the money then you are not ready to invest. Learn how to maximize your income potential during your prime age, then think of investing.

In summary, investing in shares is not for the faint-hearted, low-risk profile and goes-with-the-crowd kind of mentality investors. It is a high risk investment and you need to find out what your risk profile is, and whether shares trading are for you. You need to learn, learn and learn before committing your hard earned money and in worst case borrowing other people’s money (i.e. borrowing from banks) to invest. There will always be plenty of opportunities in the future once you have gained that knowledge, skills, confident and the emotional & financial stability before you start investing.

Having said all of the above, if you do have one of those life time opportunities that come across your way to buy cheap stocks and since you are a high-risk person, lets enjoy the thrill and exciting ride of investing. Who knows you could make a buck or two from the shares you own or maybe some pro like you will make tons of money if the market moves in your favour.

References:

• “Critical Issues on Islamic Banking and Financial Markets” by Dr. Saiful Azhar (Dinamas Publishing)


• “Islamic Finance: An Old Skeleton in a Modern Dress” by Dr. Asyraf (ISRA).