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Debt: How It Destroys Lives, How You Can Fight It

RizqwiseThe good folks at Rizqwise have a very worthy multi-part series on debt that you should really listen to.
If you haven’t got the time, this concluding episode is not to be missed. Rizqwise speak to Rehan Huda, a prominent investment banker and leading authority in Islamic Finance, about some of the key lessons we can learn from the long history of debt.
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Debt: The Full Rizqwise Series

  • How Debt Destroys Lives, Communities, and Civilizations
    Duration: 53:11
  • How to Stay Out of Debt (For Good)
    Duration: 33:58
  • Ask Risqwise: Is investing in the stock market risky?
    Duration: 27:51
  • How to Get Back on Track With Your Debt Elimination Plan
    Duration: 29:16
  • 5 Tips to Stay Motivated While Paying Off Debt
    Duration: 29:09
  • Ask Rizqwise: Should I pay off loans before investing?
    Duration: 18:45
  • Avalanche vs Snowball: Two Very Different Ways to Pay Off Debt
    Duration: 29:51
  • Ask Rizqwise: How do I go “all in” on debt?
    Duration: 26:14
  • How to Set Your Debt Free Date
    Duration: 27:31
  • The Critical First Step to Eliminating Debt Once and For All
    Duration: 20:18
  • Ask Rizqwise: Why Credit Cards Make You Spend More Money
    Duration: 20:58
  • The Great Debate: Active vs Passive Investing
    Duration: 29:21
  • Ask Rizqwise: Getting Married and Out of Debt
    Duration: 25:38

 

Resources for seekers:

 

Is It Permissible to Set a Fixed Return on an Investment?

Answered by Shaykh Faraz A. Khan

Question: Are Fixed Returns Permissible?… such as the following scenario:

Person A says “Invest in me and I will double your money in 6 months”
Person B says “I will invest £100 pounds and then after 6 months I get £200 back
Person A says “Agreed”

Answer: Assalamu alaikum wa rahmatullah,

I pray this finds you in the best of health states.

Such an arrangement is impermissible since the return amount is fixed and therefore can (and often does) lead to dispute later if the investment does not profit enough to provide the specified return amount.

Rather, one can guarantee only a percentage of the profit, which is of course unknown, such as, “15% of the profit gained,” or the like. If there is no profit, there is no return on the investment. [Maydani, Lubab; Usmani, Introduction to Islamic Finance]

And Allah knows best.
wassalam
Faraz

Checked & Approved by Faraz Rabbani

Getting Rid of ‘Fixed Income’ Returns

Answered by Shaykh Faraz A. Khan

Question: My wife became Muslim in May 2011. Her parents had opened up two investment accounts for her, a roth IRA and an Individual Investment account. They just recently transferred the accounts into her name. Upon examining it, I noticed that some of the mutual funds that they invested in were involved in “fixed income” hence riba. Please advise us on what to do. Thanks

 

Answer: Assalamu alaikum wa rahmatullah,

I pray this finds you in the best of health states.

Simply estimate (to the best of your ability) the amount of interest received from the fixed income returns, and donate it to a good cause without deriving any personal benefit or expecting any reward.

Please see this related answer for more detail:

How Do I Get Rid of Haram Money?

And Allah knows best.
wassalam
Faraz

Checked & Approved by Faraz Rabbani

Investing in Precious Metals & Minerals: Some Key Considerations

Answered by Shaykh Taha Abdul-Basser

Question: I have a question about investing in the stock market. I was looking at a stock that is offered through the investing tools with the bank I use. From what I can tell the fund primarily invests the majority of capital in gold markets with the rest in smaller precious metals. I know that I cannot invest in things that are haraam (tobacco, gambling, alcohol, etc) but do I have to worry about investing in something like metals for any reason?

Answer: Wa-`alaykum as-salam,

Yes, there are other things that a person should consider when thinking about investing in a fund like the one mentioned in your question (USAA Precious Metals and Minerals (USAGX)).

As mentioned, according to publicly available materials, this is a mutual fund whose “principal investment strategy is to normally invest at least 80% of its assets in equity securities of domestic and foreign companies principally engaged in the exploration, mining, or processing of gold and other precious metals and minerals, such as platinum, silver, and diamonds.” i.e. the fund invests in companies that themselves are engaged in the precious metal and mineral sectors as miner, processors, etc.

So the permissibility of investing in the fund depends on 1) the permissibility of investing in each of the companies in the portfolio (and this includes certain financial ratios, nature of its income, etc) and 2) the activities of the fund itself (e.g. how it manages the uninvested funds, dividends from the shares, etc).

Because these matters are difficult or impossible for non-expert end users (investors) to ascertain themselves and impermissible  financial practices prevail in the sector, it is impermissible or very makruh for the questioner to invest in the fund. One should only invest in funds that are certified as shari`ah compliant (i.e. halal) by a review board consisting of 3 or more qualified shari`ah experts.

Wa s-salam

Buying with the Intention of Capital Gain

Answered by Mufti Muhammad ibn Adam al-Kawthari

Question: Is it permissible to purchase shares with the intention of capital gain?

Answer: In the Name of Allah, Most Merciful

Shares from the stock market are generally purchased for two reasons. Some people purchase shares for the purpose of investment, hence their main aim is to become a shareholder in a company’s assets and receive the annual dividend. Others, on the contrary, purchase shares with the intention of capital gain, in that they speculate as to which shares’ value will increase and then purchase them. In other words, they purchase shares when its price is low and then sell them when its value increases; hence their aim is to make profit.

Some contemporary scholars have reservations with regards to dealing in shares with the intention of capital gain. Their basic argument is that purchasing and selling shares with the intention of capital gain is based on speculation, hence giving permission to transact in shares on this basis will open the door for gambling (qimar), which has been decisively prohibited in Shariah. Thus, according to these scholars, it will only be permitted to trade in shares with the intention of investment and receiving the annual dividend of the company.

This viewpoint, however, is a minority one; hence the majority of contemporary scholars including Shaykh Taqi Usmani, Dr Wahba al-Zuhayli and many others are of the opinion that purchasing shares is permitted regardless of whether one purchases them for capital gain or to receive the annual dividend, provided no other rules of Shariah are violated. (The conditions for the permissibility of trading in shares have been mentioned earlier)

They argue that the ruling of trading in shares is not based on the intention of the purchaser; rather, it is based on whether a “share” qualifies, in of itself, to be purchased and sold. Buying and selling shares of a company is in reality buying and selling one’s proportionate ownership in the company’s assets, hence it is permitted to trade in shares. When it is established that “shares” are a justified article of trade, then, with whatever intention one purchases them, investment or capital gain, it makes no difference. It will be permitted for one to purchase shares with the intention of capital gain, just as it is permissible to purchase them with the intention of receiving the annual dividend.

It should be remembered that speculation is not, in of itself, unlawful or disliked, for that is part and parcel of trade. A trader speculates as to which item’s value has decreased and which item’s value seems to have increased. He purchases items and commodities when their price falls and sells them when the price goes up. Thus, this kind of speculation and guess is not unlawful in Shariah.

What is unlawful is that by speculating one violates a particular injunction and ruling of Shariah, such as selling something that is not in one’s ownership, selling something that is not in one’s physical or constructive possession or getting involved in gambling and other such unlawful matters. Therefore, it will not be permitted to sell shares before they come into one’s ownership or possession. Many times, shares are sold in the stock market without they having come into one’s ownership, neither are they delivered. The idea of the various trading parties is also not to own the shares, rather they merely settle the difference in the end. At times, transactions as many as hundreds take place on a single share in one day. All of this is, without doubt, unlawful and a form of gambling.

In conclusion, the majority of contemporary scholars are of the view that trading in shares is permitted, regardless of whether the intention is capital gain or to receive the annual dividend (provided certain conditions are met, which were discussed in an earlier answer). However, one must ensure not to violate any other injunction of Shariah.

Thus, it will not be permitted to transact in shares where one sells them before actually acquiring its ownership and possession. Short sales, future sales and forward sales are not permitted for this very reason. It will only be permitted to trade in shares if the transaction is at spot and one owns the shares. As far as selling shares before the delivery of the share-certificate is concerned, Shaykh Taqi Usmani is of the opinion that this may be permitted, as the ownership in the company’s assets is established by mere transaction and not the delivery of the certificate. Ownership in the share is legally transferred from the seller to the buyer with the mere transaction taking place, hence it would be permitted to sell the shares before its delivery, although better to avoid.

And Allah knows best
Muhammad ibn Adam
Darul Iftaa
Leicester , UK

Investment in Stocks

Answered by Sidi Salman Younas

Question: What does Islam say about investment in stocks. Although there is no interest involved, some people call it forbidden. Any details please?

Answer: assalamu `alaykum

Investing in stocks is permitting if certain conditions are met, as outlined by Mufti Taqi Usmani and others. which are:

1. The main business of the company being invested in is permitted by the shari`ah.
2. The share holder must voice his disapproval of company policy if the company is involved in impermissible dealings such as interest based transactions (e.g. taking out interest-bearing loans or depositing money in interest-bearing accounts).
3. The proportion of the income from interest included in the company income must be removed from the respective shareholders dividend and given in charity.
4. The company must own some non-liquid assets.

For more details, please see: “Conditions for Investment in Shares“.

Wasalam
Salman

Checked & Approved by Faraz Rabbani

Conditions for Investment in Shares

Answered by Mufti Taqi Usmani

Question: Conditions for Investment in Shares

Answer: Taken from www.albalagh.net

Conditions for Investment in Shares

In the light of the forgoing discussion, dealing in equity shares can be acceptable in Shariah subject to the following conditions:

1. The main business of the company is not in violation of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest, like conventional banks, insurance companies, or the companies involved in some other business not approved by the Shariah, such as the companies manufacturing, selling or offering liquors, pork, haram meat, or involved in gambling, night club activities, pornography etc.

2. If the main business of the companies is halal, like automobiles, textile, etc. but they deposit there surplus amounts in a interest-bearing account or borrow money on interest, the share holder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.

3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given charity, and must not be retained by him. For example, if 5% of the whole income of a company has come out of interest-bearing deposits, 5% of the dividend must be given in charity.

4. The shares of a company are negotiable only if the company owns some non-liquid assets. If all the assets of a company are in liquid form, i.e. in the form of money that cannot be purchased or sold, except on par value, because in this case the share represents money only and the money cannot be traded in except at par.

What should be the exact proportion of non-liquid assets of a company for the negotiability of its shares? The contemporary scholars have different views about this question. Some scholars are of the view that the ratio of non-liquid assets must be 51% at the least. They argue that if such assets are less than 50%, the most of the assets are in liquid form, therefore, all its assets should be treated as liquid on the basis of the juristic principle: The majority deserves to be treated as the whole of a thing. Some other scholars have opined that even if the non-liquid asset of a company or 33%, its shares can be treated as negotiable.

The third view is based on the Hanafi jurisprudence. The principle of the Hanafi school is that whenever an asset is a mixture of a liquid and non-liquid assets, it can be negotiable irrespective of the proportion of its liquid part. However, this principle is subject to two conditions:

First, the non-liquid part of the mixture must not be in a negligible quantity. It means that it should be in a considerable proportion. Second, the price of the mixture should be more than the price of the liquid amount contained therein. For example, if a share of 100 dollars represents 75 dollars, plus some fixed assets the price of the share must be more than 75 dollars. In this case, if the price of the share is fixed as 105, it will mean that 75 dollars are in exchange of 75 dollars owned by the share and the rest of 30 dollars are in exchange of the fixed asset. Conversely, if the price of that share fixed as 70 dollars, it will not be allowed, because the 75 dollars owned by the share are in this case against an amount which is less than 75. This kind of exchange falls within the definition of “riba” and is not allowed. Similarly, if the price of the share, in the above example, is fixed as 75 dollars, it will not be permissible, because if we presume that 75 dollars owned by the share, no part of the price can be attributed to the fixed assets owned by the share. Therefore, some part of the price (75 dollars) must be presumed to be in exchange of the fixed assets of the share. In this case, the remaining amount will not be adequate for the price of 75 dollars. For this reason the transaction will not be valid.

However, in practical terms, this is merely a theoretical possibility, because it is difficult to imagine a situation where a price of the share goes lower than its liquid assets.

Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be treated in Shariah as partners “inter se.” All the subscription amounts will form a joint pool and will be invested in purchasing the shares of different companies. The profits can accrue either through dividends distributed by the relevant companies or through the appreciation in the prices of the shares. In the first case i.e. where the profits earned through dividends, a certain proportion of the dividend, which corresponds to the proportion of interest earned by the company, must be given in charity. The contemporary Islamic Funds have termed this process as “purification.”

The Shariah scholars have different views about whether the “purification” is necessary where the profits are made through capital gains (i.e. by purchasing the shares at a lower price and selling them at a higher price). Some scholars are of the view that even in the case of capital gains the process of “purification” is necessary, because the market price of the share may reflect an element of interest included in the assets of the company. The other view is that no purification is required if the share is sold, even if it results in a capital gain. The reason is that no specific amount of price can be allocated for the interest received by the company. It is obvious if all the above requirements of the halal shares are observed, the most of the assets of the company are halal, and a very small proportion of its assets may have been created by the income of interest. This small proportion is not only unknown, but also a negligible as compared to the bulk of the assets of the company. Therefore, the price of the share, in fact, is against the bulk of the assets, and not against such a small proportion. The whole price of the share therefore, may be taken as the price of the halal assets only.

Although this second view is not without force, yet the first view is more cautious and far from doubts. Particularly, it is more equitable in an open-ended equity fund because if the purification is not carried out on the appreciation and a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit of the Fund at a time when no dividend is received by it, no amount of purification will be deducted from its price, even though the price of the unit may have increased due to the appreciation in the prices of the shares held by the fund. Conversely, when a person redeems his unit after some dividends have been received in the fund and the amount of purification has been deducted therefrom, reducing the net asset value per unit, he will get a lesser price compared to the first person.

On the contrary, if purification is carried out both on dividend and capital gains, all the unit-holders will be treated at par with the regard to the deduction of the amounts of purification. Therefore, it is not only free from doubts but also more equitable for all the unit-holders to carry out purification in the capital gains. This purification may be carried out on the basis of an average percentage of the interest earned by the companies included in the portfolio.

The management of the fund may be carried out in two alternative ways. The managers of the Fund may act as mudaribs for the subscriber. In this case a certain percentage of the annual profit accrued to the Fund may be determined as the reward of the management, meaning thereby that the management will get its share only if the fund has earned some profit. If there is no profit in the fund, the management will deserve nothing, but the share of the management will increase with the increase of profits.

The second option of the management is to act as an agent for the subscribers. In this case, the management may be given a pre agreed fee for its services. This fee may be fixed in lump sum or as a monthly or annual remuneration. According to the contemporary Shariah scholars, the fee can also be based on a percentage of the net asset value of the fund. For example, it may be agreed that the management will get 2% or 3% of the net asset value of the fund at the end of every financial year.

However, it is necessary in Shariah to determine any of the aforesaid methods before the launch of the fund. The practical way for this would be to disclose in the prospectus of the fund on what basis the fees of the management will be paid. It is generally presumed that whoever subscribes to the fund agrees with the terms mentioned in the prospectus. Therefore, the manner of paying the management will be taken as agreed upon on all the subscribers.