Zakah with Debt and Extra earned money

In The Name of Allah, Most Merciful and Compassionate

You must pay zakat on the money you borrowed, if all the conditions of zakat on money exist, because debt does not prevent the obligation of zakat.

Shaykh Ibn Hajar al-Haytami, Allah have mercy on him, said in Tuhfah: "Debt owed by someone in whose hand is a zakat-payable amount (nisab) or more does not prevent it [zakat] from being obligatory for them according to the strongest of positions, whether the debt is due or deferred, whether it is owed to Allah or a human being. This is due to the general nature of the primary texts which obligate it [zakat] and because the person owns a zakat-payable amount and is able to execute transactions with it."[1]

The conditions which make zakat on money obligatory are two: (1) that you had a zakat-payable amount (the dollar equivalent of 592.9 grams of silver at that time) or more, (2) that at least this amount remained in your ownership for an entire lunar year.

So if you spent so much of the money that less than this amount remained any time during that year, you do not owe zakat on this money. However, if you invested this money, on merchandise for example, you might owe zakat on that merchandise and this zakat has its own conditions.

Then if the aforementioned two conditions are fulfilled, the zakat-year (hawl) for this money begun when you received it and ended one lunar year later. You must only pay zakat for the amount that remained with you during that entire lunar year. So if you received $5000 on Maharram 1, 1424 AH, for example, and on Maharram 1, 1425 AH you had $1000 left from the original sum, then you owe $25 zakat. And Allah knows best and He alone gives success (tawfiq).

[1] Ibn Hajar al-Haytami, Hawashi al-Sharwani Wa Ibn Qasim al-Abbadi 'Ala Tuhfah al-Muhtaj Bisharh al-Minhaj (Beruit, Dar Ihya' al-Turath al-'Arabi), 3:337.

Sunnipath.com - Shaykh Abdul-Karim Yahya, SunniPath Academy Teacher

Investing in the stock market: Is passive income permissible?

In the name of Allah, Most Compassionate, Most Merciful,

As mentioned in an earlier post, investing in the stock market and buying shares of a particular company is permissible, according to the majority of contemporary scholars, provided four conditions are met:

1) The main business of the company is lawful,

2) The company must have some liquid assets in its possession,

3) One raises his objection to the company's interest-based transactions,

4) The proportion of the company's income gained through interest-based dealings is given in charity.

As far as all the partners having physical contact and knowing one another, that is not necessary. It is not necessary Islamically that all the partners of a business know one another, remain in contact or have direct influence in the running of the business.

When one purchases the shares of a company, one will be considered a partner and share-holder of the business, hence all the rules of partnership (shirka) will apply.

In partnership, if all the partners agree to work together, then each one will be treated as an agent of the other in all matters of the business, and any work done by one of them in the normal course of business shall be deemed to be authorized by all of them.


However, if they agree that some partners will manage the business whilst the others will be considered to be sleeping partners, then that is also permissible. (See for details: Islamic finance, P. 42-43)

As far as the moral aspect (towards which you have pointed out) is concerned, that is another matter altogether. This would depend on the company of which one is being a partner, and the whole idea of the evils connected to the stock market trading. Thus, if one was to avoid investing in the stock market due this, it would certainly be a commendable act.

And Allah knows best

Muhammad ibn Adam al-Kawthari

SOURCE

Foreign Exchange Trading

In the name of Allah, Most Compassionate, Most Merciful,

Dealing in the various aspects of futures transactions, hedging, options, etc as in vogue in the stock, commodities and options markets today are not permissible in Shariah, due to the fact that they violate more than one of the many well-established principles of Shariah.

Futures transactions and Hedging

The Encyclopaedia of Britannica defines “futures” in the following words:

“Commercial contracts calling for the purchase or sale of specified quantities of commodities at specified future dates.” (See: Britannica Micropaedia, 1988, 5/65).

Futures transactions involve the selling/purchasing of a specified commodity at a future date for a specified price. In other words, the sale is conducted, but the delivery of the commodity and paying its price is agreed at a future date.

Normally, in futures, the term “commodity” is used to define the underlying asset, even though the contract is frequently separated from the product. It therefore differs from a simple forward sale in the cash market which involves actual delivery of the commodity at the agreed time in the future.

Futures transactions normally take place in a special market known as the “commodity exchange market”. There is a special membership fee for dealing in this market. Non-members may transact through the medium of members.

The objective in such transactions is not to buy, sell and actually take delivery of the commodities, rather to settle the differences of prices only. At times, prior to the specified date of delivery approaching, the commodity is transacted and sold further to another party, and they also sell it further and so on, to approximately 100 transactions or more in some cases. And when the specified date of delivery appears, each party settles the difference between the buying and selling price. The idea is to gain profit without having to actually take the burden of delivering the commodity.

Hedging is also part of futures transactions and is a kind of insurance against any possible loss. It is a strategy designed to reduce investment risk using the futures contracts. It involves taking a position in a futures market opposite to a position held in the cash market to minimize the risk of financial loss from an adverse price change; a purchase or sale of futures as a temporary substitute for a cash transaction that will occur later. (See: Gerald, Modern Commodity Futures Trading)

The Shariah ruling with regards to futures transactions is quite clear, in that they are without doubt unlawful (haram) and impermissible, for they contravene more than one of the principles of a valid Islamic transaction.

Firstly, it is a well-established and recognized principle of Shariah that a sale must be instant and absolute. It can not be effected or attributed to a future date. Thus, if a transaction or sale is attributed to a future date, or if a sale is contingent on a future event, then the transaction will be void. Yes, one can promise to sell on a future date, but a new separate deal based on offer (ijab) and acceptance (qabul) will have to take place. All the jurists (fuqaha) are unanimous on this established principle.

An example of a sale attributed to a future date is when: A says to B on the first of January: “I sell my car to you on the first of February for £5000.” This sale will be void, for it is attributed to a future date.

An example for a sale contingent on a future event is when, A says to B: “If party X wins the elections, my car stands sold to you”. This sale will also be void, because it is contingent on a future event.

The great Hanafi jurist (faqih), Allama Ibn Abidin (Allah have mercy on him) states:

“Deferment (ta’jil) in the delivery of the commodity is not permissible and will make the sale void.” (Radd al-Muhtar ala al-Durr, 4/531).

Imam al-Mawsili (Allah have mercy on him) states:

“If one sold a commodity on the condition that its delivery will take place at the end of the month, then this sale will be void, because deferring commodities is invalid (batil).” (al-Ikhtiyar li ta’lil al-mukhtar, 1/276)

Thus, attributing the sale or conditioning the delivery of the commodity to a future date will make the sale and transaction invalid. The sale must be absolute and instant according to Shariah. Therefore, the futures transaction which took place between the first seller and the first buyer was invalid due to it being attributed to a future date, and as a result the following transactions will also all become void.

Another well-established principle of Shariah violated in the futures transactions is that the commodity is sold without the seller actually owning the commodity or (at the least) having possession over it, both of which (ownership & possession) are indispensable for a valid sale according to Shariah.

In order for a sale to be valid, the seller must own the commodity and must also have acquired its possession. This possession can be either physical or constructive. Constructive possession means a situation where one has not taken physical delivery of the commodity, but it has fully come into ones control and all the rights and liabilities are passed on to him.

Hakim ibn Hizam (Allah be pleased with him) reports that he said to the Messenger of Allah (Allah bless him & give him peace): “O Messenger of Allah! At times an individual comes to me to purchase a specific item that I do not possess. Can I sell him the item and then purchase it from the market? The Messenger of Allah (Allah bless him & give him peace) said: “Do not sell what you don’t own.” (Sunan Tirmidhi, no. 1232 & others)
Regarding the prohibition of selling a commodity before acquiring its possession, Sayyiduna Abd Allah ibn Umar (Allah be pleased with him) narrates that the Messenger of Allah (Allah bless him & give him peace) said: “Whosoever sells foodstuff, then he must not sell it before taking its possession.” (Sahih al-Bukhari, no. 2019 and Sahih Muslim, no. 1525)

Sayyiduna Abd Allah ibn Abbas (Allah be pleased with him) narrates that the Messenger of Allah (Allah bless him & give him peace) forbade the selling of foodstuff before acquiring its possession. Ibn Abbas states: “I consider this ruling to be in all transactions.” (Sahih al-Bukhari & Sahih Muslim)

The third reason for the impermissibility of such transactions is that it falls in the category of selling a debt against a debt which also is prohibited in Shariah. When an individual sells a commodity in the futures market, it is promised that the commodity will be delivered at a later date. Similarly, the price is also deferred making the transaction into the exchanging of debt against a debt. The commodity remains a debt which the seller owes to the purchaser whilst the price remains a debt upon the buyer.

Exchanging a debt against a debt is not permissible in Shariah. Sayyiduna Abd Allah ibn Umar (Allah be pleased with him) narrates that the Messenger of Allah (Allah bless him & give him peace) prohibited the selling of a debt in return for a debt (bay al-kali bi al-kali). (Sunan al-Bayhaqi, 5/290, Sunan Darqutni, 3/71 and Hakim in his al-Mustadrak, 2/57).

Due to the above reasons, futures transactions are totally impermissible in Shariah, regardless of their subject matter. Also, it makes no difference whether these contracts are entered into for the purpose of speculation or for the purpose of hedging. Both situations are impermissible.

Options

An option is a contractual agreement that gives the holder the right to buy (call option) or sell (put option) a fixed quantity of a security or commodity at a fixed price, within a specified period of time.

For example: A promises B that he will purchase a specific commodity for £100 at any time between the 1st of January and the 1st of March. B will have the right to sell that particular commodity to A for £100 within that period, but he will not be obligated, although if he does desire to do so, A will be obligated to purchase it. This option (of sale) which B has is known as the “put option”. If however, A promised B that he will sell him a specific commodity for £100 during a specific time, if B desired to purchase it, then this will be known as the “call option”. Here the holder of the option (B) has a right to buy the commodity whenever he desires during that fixed period, although he will not be obligated to do so. The one giving the option (or promising to buy or sell) will charge a fee for his promise and service.

Options contracts are not only restricted to commodities, rather one can also purchase options on future contracts, interest rates and currencies in the same way. The price one pays for the option is called the “premium” and the price at which it is agreed that one may buy or sell the commodity, etc… is called the “exercise price”.

The objective behind these option contracts is to guarantee oneself from the fall in the prices of commodities and currencies. For example: A purchased one British pound for two dollars. Now, he fears that if he keeps this pound in his possession, the value of the pound may fall in the future, thus he will suffer loss. But at the same time, if he was to sell his pound at present, he may well deprive himself of potential profit, for the price of the pound may rise in the future. Therefore, he enters into a options agreement where he purchases a option to sell his pound for two dollars for a specific period, thus if the price of the pound rises he will sell it in the market, and if it falls, he has the option to sell it for two dollars to the person from whom he purchased the option.

Moreover, these options have become an article of trade themselves, where individuals further sell these options to others in the options market.

From a Shariah perspective, options contracts are also unlawful (haram) and not permissible. The reason being, is that a promise to sell or purchase is in itself permissible and is morally binding upon the promisor, but this promise can not be a subject matter of a sale or purchase. In other words, it will not be permissible to charge a fee for making such a promise.

Similarly, it will not be permissible to further sell these options, for they are not something that can be traded in. An intangible object can not be a subject of sale according to the Fuqaha except with certain conditions, which are not met here.

Furthermore, there is an element of interest (riba) in these contracts. The extra fee charged by the one who makes the promise is in addition to the price of the commodity. This is more relevant where currency is being traded in.

For the above reasons, Shaykh Mufti Taqi Usmani (may Allah preserve him) issued the following Fatwa in his Contemporary Fatwa:

“Since the prevalent options transactions in the options market are based on charging fees on these promises, they are not valid according to Shariah. 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.” (See: Contemporary Fatawa, p. 152)

I hope I have been able to clarify the aspects related to futures and options transactions. And Allah knows best

Muhammad ibn Adam al-Kawthari
Source

Mutual Funds: Are they allowed?

In the name of Allah, Most Compassionate, Most Merciful,

A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective.  The mutual fund will have a fund manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds).  When you invest in a mutual fund, you are buying shares (or portions) of the mutual fund and become a shareholder of the fund. 

Mutual funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy).

By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own.  But the biggest advantage to mutual funds is diversification.
Diversification is the idea of spreading out your money across many different types of investments.  When one investment is down another might be up.  Choosing to diversify your investment holdings reduces your risk tremendously.

The most basic level of diversification is to buy multiple stocks rather than just one stock.  Mutual funds are set up to buy many stocks (even hundreds or thousands).  Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on.  It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, low-grade corporate bonds, international small companies).


The ruling with regards to mutual funds from an Islamic perspective can be determined by understanding the Shar�i ruling on shares and bonds.

The ruling with regards to investing in shares is that this is permissible (according to the majority of contemporary scholars), provided the following conditions are met:

1)     The main business of the company must be lawful (halal). Therefore, to purchase shares of a company whose main business is unlawful, such as interest bearing banks, insurance companies, companies manufacturing and selling liquor, etc will not be permitted.

If the main business of the company is Halal, such as a textile company or a telecommunication company, then it will be permissible to subscribe to its shares.

2)     Many companies, despite their main business being Halal may be involved in interest dealings in one way or another. Due to this, the following is necessary:

 a)     One should object to the interest dealings, preferably in the annual AGM. By doing so, the responsibility will be deemed fulfilled.
b)     When the dividend is distributed, the proportion of the company�s income which was gained by interest dealings must be given in charity without the intention of receiving reward, as is the case with unlawful money in general. This amount (interest accumulation) may be known by means of the income statement.

3)     The company whose shares one intends to purchase must have some illiquid assets in its possession. It must not all be in liquid form (i.e. cash, cheques, bonds, etc�). If all of the company�s assets are in liquid form, then the share cannot be sold or purchased except at face value.

With regards to bonds, the ruling is that, it is not permissible to invest in them. Premium bonds do not represent the ownership of the holder in a company or a financial institution; rather it only signifies giving a loan to the issuers of these bonds.

Due to this fact, the excess amount received on these bonds, which is stipulated and sought from the contract, is regarded as usury (riba), and is thus unlawful (haram).

Now, if investing in a mutual fund is regarded as purchasing the shares of the fund and becoming a share holder, then the ruling is that this is not permissible. The reason being, that one of the conditions for the permissibility of purchasing shares was that the company has some illiquid assets (see condition, 3), and the fund here is a combination of peoples investments.

If the case is that the fund is merely acting as an intermediary for the investment in shares and bonds, then this would also be impermissible. The reason being, that one is unaware what kind of companies the fund will invest into. Also, the funds normally invest in bonds, which have been declared unlawful.

And Allah knows best

Muhammad ibn Adam, UK

SOURCE

Trading in currencies

In the name of Allah, Most Compassionate, Most Merciful,
Scholars of the past considered paper currency to be representing gold and silver, hence they did not regard it to be something that had a value in of itself. Paper money was merely thought to be a certificate indicating that its holder owns gold and silver to the value of the note.

When one gave another a paper note, he was not giving any money that had a value in of itself, rather one was merely delivering a certificate that enabled the receiver to recover its amount in gold or silver.
Therefore, they stated that if Zakat was given in paper currency, one�s Zakat was not fulfilled, for one has not given any money to the poor. One�s Zakat will only be fulfilled when the recipient gets hold of gold or silver which the paper currency represents, or when one purchases an item with the money. Similarly, they stated that purchasing gold or silver with paper currency is not permissible, because it is like exchanging gold for gold, and the condition in exchanging gold with gold or silver is that both parties must take possession of the things exchanged in the same session, whereas here, the one taking the paper note is not physically taking possession of gold or silver. He is only receiving a certificate on the back of which there is gold or silver.

The Sound Position

However, most contemporary scholars such as Shaykh Taqi Usmani and others declared that paper currency has now become a medium of transaction in of itself; hence it is considered to be in place of gold and silver.
They state that the promise to pay gold and silver which appears on these paper notes is now meaningless and of no significance. The notes cannot be converted into gold, and they are accepted as money throughout the world. One cannot legally demand the one paying in notes that he must pay in gold or silver.
Paper currency no longer represents gold or silver, because in reality there is no guarantee of gold being on the back of every note. It is considered to be a legal tender and has now become a medium of transactions in of itself; hence it has taken the place of gold and silver.

Based on this, they state, the obligation of Zakat will be fulfilled by giving paper currency to the poor and needy. Also, one will be permitted to purchase gold and silver with these notes.
Moreover, Shaykh Taqi Usmani is of the view that paper currency is not to be treated as gold and silver, rather it is a separate unlimited legal tender. It would fall into the category of what the early Muslims called Fulus. (See: Buhuth fi Qadhaya Fiqhiyya Mu�asira, p. 147-161)

Trading in currency

Based on the above brief explanation, trading in currencies of the same country with excess on one side, like exchanging one pound for two pounds is unlawful, for that constitutes Riba. However, it would not be necessary that both parties take possession of money exchanged in the same session, as is the case with exchanging gold for gold. The reason being is that paper currency is not treated like gold and silver, rather it is legal tender and medium of exchange in of itself. However, one party must take possession in the session (majlis) of transaction, because departing (iftiraq) one another with debts on both sides is not permitted.
If the currency was exchanged at par value, such as exchanging one pound for one pound, then this is without doubt permissible.


As far as exchanging the currencies of different countries is concerned, this is permissible even with excess on one side, such as exchanging one pound for two dollars. The reason being is that the genus (jins) of both currencies is different, and when exchanging items of varied nature, it is permitted to have excess on one side.
Therefore, it is permitted to trade in currencies of different countries and to make profit from such trade. However, it would be necessary that one party takes possession of his currency at the time of transaction, for departing with debt on both sides is not permitted according to the Hadith.

Note that this permissibility is in normal circumstances, but scholars mention that trading in currencies at a rate that is against the rate determined by the government will not be permitted, although it can not be considered Riba.

This is based on the ruling that one must obey the law of the land in things that are not contrary to Shariah. Thus, if the government fixes a rate of exchanging pounds for dollars, then it will be sinful from an Islamic perspective also to trade in the black market at a different rate. However, one will not receive the sin of being involved in Riba.

And Allah knows best

Muhammad ibn Adam al-Kawthari

Source

Investing in the Stock Market

In the name of Allah, Most Compassionate, Most Merciful,

To invest in the share of a particular company or to purchase shares a company’s from the stock market has been a matter of debate between the contemporary scholars.

Some contemporary scholars (who are very few) are of the opinion that it is not permissible to invest in shares. There basic argument is that, shares do not represent an ownership for the share-holder in the company’s assets, rather the share certificate is a document that signifies lending of some amount of cash to a particular company. The dividend which one receives will be considered interest (riba), thus unlawful.

The majority of the scholars, however, do not agree with this opinion. Scholars such as, Shaykh Ali al-Khafif, Dr. Wahba al-Zuhaili, Shaykh Taqi Usmani and others have declared investing in the shares of companies lawful (halal) subject to certain conditions.

They say that the share certificate actually signifies an ownership in a company for the share-holder. His ownership is in proportion of his investment in the company. This is the reason why if the company was to become bankrupt, the share-holder will not regain his investment in the state of cash, rather he will receive the company’s assets according to his proportionate ownership.

Therefore, it will be permissible to invest in the shares of companies, and the share certificate will not imply lending cash to the company.
If one intends to purchase shares from the stock market, it will be permissible with adherence to the following conditions:
1) The main business of the company must be lawful (halal). Therefore, to purchase shares of a company whose main business is unlawful, such as interest bearing banks, insurance companies, companies manufacturing and selling liquor, etc... would not be permitted.
If the main business of the company is Halal, such as a textile company or a telecommunication company, then it will be permissible to subscribe to its shares.
2) Many companies, despite their main business being Halal may be involved in interest dealings in one way or another. Due to this the following is necessary:
a) One should object to the interest dealings, preferably in the annual AGM. By doing so, the responsibility will be deemed fulfilled.
b) When the dividend is distributed, the proportion of the company’s income which was gained by interest dealings must be given in charity without the intention of receiving reward, as is the case with unlawful money in general. This amount (interest accumulation) may be known by means of the income statement.

3) The company whose shares one intends to purchase must have some illiquid assets in its possession. They must not all be in liquid form (i.e. cash, cheques, bonds, etc…). If all of the company’s assets are in liquid form, then the share cannot be sold or purchased except at face value.

The reason for this is that the share in this case represents money only, and money cannot be traded in except at par.

If the above three/four conditions are complied, then it will be permissible to trade in shares from the stock market.

As far as working as a stock broker is concerned, the work normally consists of buying and selling shares on behalf of a client. In the light of the above, it becomes clear that those shares in which it is permissible to trade, his work will also be permissible, and vice versa.

Therefore, it would be better not to work as a stock broker. However, if one is able to save oneself being involved in unlawful trading then it will be permissible.

And Allah knows best

Muhammad ibn Adam, UK

SOURCE