Is Stock Market Trading Halal If Done Within Shari‘a Guidelines?

Answered by Shaykh Muhammad Carr

Question

Is stock market trading permissible if I adhere to Shari‘a guidelines, such as avoiding prohibited industries, maintaining low debt ratios, and purifying any impermissible income?

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]

Stock trading is permissible if you adhere to the Sharia guidelines and purify all impermissible income.

The Stock Market

The stock market is similar to a physical marketplace. From an Islamic perspective, there are certain businesses with which you may trade, while others, such as liquor stores, must be avoided. The same principle applies to the stock market.

The stock market is a broad term for the network of exchanges, brokerages, and over-the-counter venues where investors buy and sell shares in publicly traded companies. [Investopedia]

Criterion

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:

One: 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.

Two: 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.

Three: 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.

Four: 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]

General Consensus on Purification of Income

In Islamic finance, the purification of income, particularly dividends, is a fundamental principle to ensure that earnings comply with Sharia. There is a general consensus that purification is required.

Most scholars and Islamic finance standards, such as those by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions), require the purification of dividends if they include any proportion of income derived from non-compliant sources like interest (riba). This ensures the income is halal (permissible). And Allah knows best.

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 benefited 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.