How Should Muslims Evaluate Shares in Defense-Industry Companies?

Answered by Shaykh Muhammad Carr

Question

Is a major non-Muslim government-owned defense-electronics manufacturer considered Shari‘a-compliant, given that some sources provide differing opinions? If it is not compliant, what should I do with the shares I have held for the past two years?

Answer

In the Name of Allah, the Most Merciful and Compassionate.

Thank you for your question.

“So fear Allah all you can, and hear, obey, and expend: It were better for your very selves.” [Quran, 64:16]

Any non-Muslim government-owned defence electronics manufacturer is a Shari‘a non-compliant stock. It is not a Shari‘a-compliant company as per the Shari‘a screening criteria. [See Islamicly.com]

You should dispose of your stocks in this. According to the AAOIFI Shari‘a Standards, purification is not required if you sell your shares before the end of the financial period.

Purification of Proceeds from the Sale of Shares

The AAOIFI Sharia Standards believe that,

“3/4/6 It is obligatory to eliminate prohibited income specific to the share that is mixed up with the earnings of the corporations, and this in accordance with the following:

3/4/6/1 The elimination of prohibited income is obligatory on one who is the owner of the share, whether an investor or a trader, at the end of the financial period, even if the payment is due at the time of issuance of the final financial statements, whether quarterly, annual, or for other period.

Accordingly, elimination is not obligatory for one who sells the shares before the end of the financial period.” [AAOIFI]

Defense Stocks

Companies involved in defense, Arms, Weapons, Military, and Aerospace industries may have some very significant Shari‘a compliance issues. This is based on avoiding aiding in sin and transgression. [See: Quran, 5:2]

Islamic investors are concerned that companies involved in arms, ammunition, and warfare industries are, directly or indirectly, likely to support atrocities against humans in general.

Some scholars argue that such industries must be considered Shari‘a-compliant unless there is direct evidence of the illegal use of their weapons and warfare products. Hence, companies deriving revenues from manufacturing or supplying defense equipment, warfare supplies as well as arms and ammunition, should be considered Sharia-compliant.

Such scholars believe that defense industries are vital for countries to safeguard and defend themselves against oppressors and to maintain their sovereignty. Hence, the end use of such warfare products can have a clear Shari‘a-permissible usage.

Furthermore, defense and warfare industries are subject to global scrutiny of customers and have strict policies in place to screen out anti-state elements, thereby avoiding the direct sale of arms to entities with potential non-compliant usage.  [See: Islamicly]

Criterion for Shari‘a-Compliant Investment

The objectives of the companies you wish to invest in or trade shares with must not be prohibited, such as the manufacturing of liquor, trading in swine, or engaging in transactions involving Riba. If the corporation’s objectives are impermissible, then its formation is also impermissible, and consequently, investing in or trading shares of such a corporation is likewise prohibited.

The fundamental rule is that acquiring shares in, and engaging in transactions (investment or trading) involving the shares of corporations that occasionally engage in interest and other prohibited activities despite their primary business being permissible is prohibited.

However, this rule does not apply to subscription and transactions (investment or trading) under the following conditions:

1. The corporation must not state in its memorandum of association that one of its objectives is to deal in interest, or engage in the trade of prohibited goods or materials such as pork (swine) and similar items.

2. The total amount raised through interest-based loans, whether long-term or short-term debt, must not exceed 30% of the corporation’s total asset value. It is important to note that raising loans on interest is prohibited regardless of the amount.

3. The total amount of interest-bearing deposits, whether short-term, medium-term, or long-term, must not exceed 30% of the corporation’s total asset value. It should be understood that interest-bearing deposits are prohibited, regardless of the collective amount.

4. The income generated from prohibited activities or assets must not exceed 5% of the corporation’s total revenue, regardless of whether the income comes from engaging in a prohibited activity, owning a prohibited asset, or other sources. If any income source is not adequately disclosed, additional effort should be made to identify it, ensuring that due diligence and caution are observed. [See: AAOIFI]

I pray this is of benefit and that Allah guides us all.
[Shaykh] Muhammad Carr
Checked and Approved by Shaykh Faraz Rabbani

Shaykh Muhammad Carr has dedicated his life to studying and transmitting our beautiful deen. His studies have taken him around the globe, where he has benefitted from many luminaries. Under the guidance of his teachers – Shaykh Taha Karan, Shaykh Yaseen Abbas, Shaykh Muadh Ali, and many others – Shaykh Muhammad has grown to appreciate the beauty and benefits of diverse scholarship. He completed his memorization of the Qur’an at Dar al-Ulum Zakariyyah in September 1997 and received an Alimiyya Degree in 2006 from DUAI (Darul Ulum al-Arabiyyah al-Islamiyyah). He is also affiliated with Masjid Auwal in Bo Kaap, Cape Town (the oldest mosque in South Africa), where he serves as a co-imam, and Dar Al-Safa, where he has taught since 2018. As a teacher, he imparts the wisdom of our heritage and tradition by opening the door to students. As an imam, he has the unique opportunity to serve his community in daily life.

In addition to his roles as a teacher and imam, Shaykh Muhammad Carr has contributed significantly to the administrative and advisory aspects of Islamic institutions. Since 2023, he has served as the Administrative Director at The Imam Kurani Institute, contributing to the institution’s growth and development. He continues to pursue traditional Islamic Sciences, possessing a keen interest in Islamic Contract Law and Finance. Shaykh Muhammad has been a Shari‘a Board Member for Islamic Asset Management & Insurance Companies since 2001, aligning financial practices with Islamic principles.