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Shariah Screening Criteria

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    Meant for any positive informative discussions regarding Shariah Screening Criteria, while strictly following the forum rules and norms of decency.

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    Shariah Screening Criteria

    Presently Shariah compliance of stocks is done under the guidance of qualified and reputed Shariah experts. For stocks to be “Shariah compliant”, it must meet ALL the six key tests given below:

    1.Business of the Investee Company
    The core business of the company should not violate any principle of Shariah. Therefore, it is not permissible to acquire the shares of the companies providing financial services on interest like conventional banks, insurance companies, leasing companies or the companies involved in some other business not approved by the Shariah e.g. Companies making or selling liquor, pork, haram meat, or involved in gambling, or any other impermissible activities.
    If the main business of the investee companies is Halal, like automobiles, textiles, manufacturing concerns etc but they deposit their surplus amounts in an interest bearing account or borrow money on interest, the share holder must express his/her disapproval against such dealings, preferably by raising his/her voice against such activities in the annual general meeting of the company and/or by sending a letter to the management in this regard.

    2.Interest Bearing Debt to Total Assets, <37%
    The Interest Bearing Debt to Assets ratio should be less than 37%. To understand the rationale behind this condition, it should be kept in mind that such companies are mostly based on interest. Here again, the aforementioned principle applies i.e. if the shareholder is not personally agreeable to such borrowings, but has been overruled by the majority, these borrowing transactions cannot be attributed to him/her. Debt, in this case, is classified as any interest bearing debt including Bonds, TFCs, Commercial Paper, Conventional Bank Loans, Finance Lease, Hire Purchase, issuing preference shares etc.

    3.Non-Compliant Investments to Total Assets, <33%
    The ratio of Non Compliant Investments to Total Assets should be less than 33%. Non-Shariah Compliant Investments include investments in conventional mutual funds, conventional money market instruments, Commercial Paper, interest bearing bank deposits, Bonds, PIBs, FIB, T-Bills, CoIs, CoDs, TFCs, DSCs, NSS, derivatives etc. Non-Compliant investments also include investments in companies which are declared Shariah non-Compliant due to non-compliance to any of the mentioned criteria for Shariah Compliance.

    4.Non-complaint Income to Total revenue, <5%
    The ratio of Non Compliant Income to Total Revenue should be less than 5%. Total Revenue includes Gross Revenue plus any other income earned by the company. Non Compliant Income includes income from gambling, income from interest based transactions, income from Gharar based transactions i.e. derivatives, insurance claim reimbursement from a conventional insurance company, any penalty charged on late payment in credit sale, income from casinos, addictive drugs, alcohol, dividend income from above mentioned businesses or companies which have been declared Shariah Non-Compliant due to non-compliance to any of the mentioned criteria for Shariah Compliance etc.

    5.Illiquid Assets to Total Assets, >25%
    The ratio of Illiquid Assets to Total Assets should be at least 25%. The Sum of all those assets whose trade price can deviate from par value, according to the rules of Shariah, is considered the aggregate value of illiquid assets. Illiquid Assets include inventory of raw materials, work-in-process, all fixed assets such as property, plant & equipment, stores and spares, stock in trade etc.

    6.Net Liquid Assets/Share vs Market Price/Share
    Market Price per share should be at least equal to or greater than net liquid assets per share.
    Courtesy of Al-Meezan Investments Ltd. Shariah Advisors
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."



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    Hope this will Inshallah help all of us who, from time to time, got into some heated discussion in the ‘Shariah Screening Criteria’ thread.

    Definition: Disagreement is when ideas, positions, or sayings carried by an individual or group are different from the opinions of others.

    The Etiquettes of acceptable disagreement in Islam:

    1. The Muslim should avoid disagreement as much as possible. Disagreement should come only when there is a valid reason.

    2. The Muslims should only have acceptable disagreements among themselves based on what has been mentioned.

    3. In case of a dispute or disagreement in any matter of deen muslims should referee to the Book of ALLAH and the Authentic sunnah of Prophet Muhammad (S.A.W.). However in any matter of worldly live should be refereed to those who specialize in the matters.

    4. The Muslim must be ready to accept the verdict from ALLAH (S.W.T.) and His Messenger with complete submission after the truth becomes clear to them. In this case they should not stick to the wrong opinion.

    5. The intention in the disagreement should be only pure for the sake of ALLAH (S.W.T.), not to satisfy one's desire or arrogance.

    6. Everyone in this disagreement should believe that there is a possibility for the others to have the truth or the correct opinion.

    7. People, who disagree, should have the good Etiquette and behavior in their discussion. This should include that they look to the matter objectively, not to go out of the subject, choosing the accurate word, clarifying the meaning of the term that they will use, and also that they select the best words and statement avoiding the bad ones, that they listen to the other opinions carefully with an open mind, and finally, to avoid interrupting others while giving enough time for them to express their points.

    8. People who disagree should not continue with aimless arguing, they should end their discussion soon after the opinions are proven clearly or when believing that the others are hardheaded with their opinion.

    9. Muslims in their disagreement should restrain themselves from accusing others of deviation, corruption, or other accusations, and should instead believe that they are good and sincere in their opinions.

    10. The goal of the discussion should be only to reach the correct opinion and that it is not important to reach the correct opinion through you or others.

    11. If no agreement is reached, then they should respect each other’s opinion with finding an excuse for that person. This is in the frame and methodology of the people of the sunnah and jama'h. And also to cooperate with other points agreed upon.

    12. Supplication to ALLAH (S.W.T.) to open our hearts and minds to the truth.

    O’ ALLAH show us the truth clearly and help us to follow it and love it.
    O’ ALLAH show us the false clearly and help us to stay away from it and to hate it.

    Please contact Al Meezan Investment Management Ltd., who screen shares according to 'Shariah Screening Criteria', in case of a difference of opinion.


    Call Toll Free: 0800 - HALAL (42525)
    Email: info@almeezangroup.com

    Registered Office
    Ground Floor, Block B,
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    Karachi, 74400
    UAN: 111-633-926 (Meezan)
    Tel: (92-21) 35630722-26
    Fax: (92-21) 35676143

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    Banglow # 43-5-E/2
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    Tel: (92-21) 34536602-05
    Fax: (92-21) 34536601

    Lahore Office
    Office No. 1, Ground Floor,
    Leads Centre,
    Gulberg III, Main Boulevard,
    UAN: 111-633-926 (Meezan)
    Tel: (92-42) 35783608-12
    Fax: (92-42) 35784091

    Faisalabad Office
    First Floor, Taj Plaza,
    Kotwali Road,
    Tel: (92-41) 2412371-4
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."



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    Shariah scholars

    Mufti Muhammad Taqi Usmani

    Mufti Muhammad Taqi Usmani is a renowned figure in the field of Shariah, particularly in Islamic Finance. He currently holds advisory positions in a number of financial institutions practicing Islamic Banking and Finance.

    Mufti Muhammad Taqi Usmani has vast experience in Islamic Shariah, teaching various subjects on Islam for 39 years. He has served as a Judge in the Shariat Appellate Bench, Supreme Court of Pakistan from 1982 to 2002. He is also the Editor of the magazine ‘Albalagh’ (a weekly publication of Jamia Darul Uloom, Karachi) as well as an active contributor of articles in leading Pakistani newspapers.

    Born in India, Mufti Muhammad Taqi Usmani graduated from Punjab University, Pakistan in 1970 and also holds an LLB from Karachi University, Pakistan. Prior to these, he completed the ‘Takhassus’ course, which is the specialization course of Islamic ‘Fiqh’ and ‘Fatwa’ (Islamic Jurisprudence) from Jamia Darul Uloom Karachi, Pakistan.

    In March 2004, His Highness Sheikh Mohammad Bin Rashid Al Maktoum (Dubai Crown Prince and UAE Minister of Defense) presented a special award to Mufti Muhammad Taqi Usmani in recognition of his lifetime service and achievement in Islamic Finance at the occasion of International Islamic Finance Forum, Dubai, which is one of the biggest events in Islamic Finance Industry.

    Mufti Muhammad Taqi Usmani advises a number of international financial institutions including Dow Jones, Bharain Monetary Agency and Islamic Corporation for the Development of the Private Sector (A Member of the IDB Group) on Islamic law.

    Sheikh Abdul Sattar Abu Ghuddah

    Dr. Abdul Sattar Abu Ghuddah is the Shariah Advisor and Director, Department of Financial Instruments at Al-Baraka Investment Co. of Saudi Arabia. He holds a PhD in Islamic Law from Al Azhar University Cairo, Egypt. He is an active member of Islamic Fiqh Academy and the Accounting & Auditing Standards Board of Islamic Financial Institutions.

    Dr. Abdul Sattar teaches Fiqh, Islamic studies and Arabic in Riyadh and has done a valuable task of research and compiling information for the Fiqh Encyclopedia in the Ministry of ‘Awqaf’ and Islamic Affairs, Kuwait. He has been a member of the ‘Fatwa’ Board in the same Ministry from 1982 to 1990.

    Dr. Daud Baker

    Dr. Muhammad Daud Bakar was an Associate Professor in Islamic Law and Deputy Rector at the International Islamic University Malaysia (IIUM). He received his first degree in Shariah from the University of Kuwait in 1988 and Ph.D from the University of St. Andrews, U.K. in 1993. He completed his external Bachelor of Jurisprudence at University of Malaya 2002.

    He is presently a member of the Shariah Advisory Council at the Central Bank of Malaysia, Securities Commission of Malaysia, Oasis Asset Management (Cape Town, South Africa), Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Dow Jones Islamic Index (New York). Dr Bakar now operates his own Islamic training and education facility.

    Sheikh Yusuf Talal DeLorenzo

    Sheikh Yusuf serves as a Shariah advisor to over 20 global financial entities, including index providers, banks, mutual funds, real estate funds, leasing funds, institutional investors, home finance providers, alternative asset managers and others.

    Sheikh Yusuf is the author of “A Compendium of Legal Opinions on the Operations of Islamic Banks”, the first English reference on the fatawa issued by Shariah boards. His three-volume publication has become the standard reference for Islamic financial institutions. In addition, Sheikh Yusuf wrote the introduction to “Islamic Bonds”, the 2003 book that introduced Sukuk and transformed the world’s Islamic capital markets. His written work has appeared in journals and newsletters and as chapters in books, including Euromoney’s “Islamic Asset Management”, “Islamic Retail Finance and Islamic Finance: Innovation & Growth”. His entries on the terminology of Islamic Finance appear in The Oxford Dictionary of Islam.

    Sheikh Yusuf is also a special consultant, appointed by the Asian Development Bank and the Islamic Development Bank in Jeddah to the International Financial Services Board (“IFSB”) on the subject of Sukuk. IFSB is the international standard-setting body of regulatory and supervisory agencies that have a vested interest in ensuring the soundness and stability of the Islamic financial services industry, broadly defined to include banking, capital markets and insurance.

    Sheikh Nizam Yaquby

    Sheikh Nizam Yaquby is a graduate in Economics and Comparative Religion from McGill University and is an internationally acclaimed scholar in the Islamic banking industry. He advises a number of banks and financial institutions including Abu Dhabi Islamic Bank, BNP Paribas, Dow Jones, Lloyds TSB, Citi Islamic Investment Bank E.C. Bahrain and Standard Chartered on matters pertaining to Islamic Banking and Finance.

    Sheikh Nizam Yaquby has contributed important original research on many aspects of modern Islamic finance, and is considered one of the world’s leading experts in the field. Since 1976, he has taught tafsir, hadith and fiqh in Bahrain. He is also the author of several articles and publications on Islamic finance and other sciences in English and Arabic.

    Dr. Mohamed A. Elgari

    Dr. Mohamed A. Elgari holds a Ph.D. in economics from the University of California. He is a professor of Islamic Economics at King Abdul Aziz University. He is an expert at the Islamic Jurisprudence Academies of the Organization of Islamic Countries and the Islamic World League. Dr. Elgari is member of Shariah Boards of many Islamic Banks and Takaful Companies including that of Dow Jones, International Islamic Fund Market, Citi Islamic Investment bank, Merrill Lynch and Saudi American Bank.

    Mufti Hassan Kaleem

    Mufti Hassan Kaleem studied Islamic jurisprudence at Jamia Darul Uloom Karachi and specialized in the science of issuing Islamic legal edicts. He serves on the Shariah board of a number of international institutions including Deloitte and Bank al-Baraka. He is renowned as an expert on Takaful (Islamic insurance). He is a student of the renowned Sheikh Taqi Usmani.

    Dr. Muhammad Imran Ashraf Usmani

    Dr. Muhammad Imran Ashraf Usmani is a M. Phil and Ph. D. in Islamic Finance and is a graduated as a scholar from Jamia Darul Uloom, Karachi, Pakistan. He has also completed the specialization course in Islamic Jurisprudence from Jamia Darul Uloom, Karachi, Pakistan. Currently he is involved in conducting training sessions for Meezan Bank’s staff in the area of Islamic finance and has been teaching several subjects of Islamic Fiqh since 1998 at Jamia Darul-Uloom, Karachi, Pakistan. Dr. Usmani has also authored various books on Islamic Shariah and especially his book ‘Meezan Bank’s Guide to Islamic banking’ has been the guiding light in the area of Islamic Banking.

    Dr. Usmani serves as a Sharia Supervisory Board Member / Sharia Advisor to State Bank of Pakistan, HSBC Amanah Finance, Credit Suisse, Lloyds TSB, Meezan Bank, Pak Kuwait Takaful Co and others.

    Mufti Najeeb Khan

    Mufti Najeeb Khan is Shariah Advisor at Habib Metropolitan Bank and a leading authority on Shariah compliancy. He holds the notable distinction of having personally overseen the execution of over one thousand murabaha transactions and is keenly familiar with the issues involved in the area of Shariah compliancy related to execution. He delivers talks at a variety of institutes and conferences including the National Institute for Banking and Finance, Jamia Darul Uloom, and the Centre for Islamic Economics. He holds the Alamiyyah and Takhassus from Jamia Darul Uloom.

    Mufti Muhammad Zubair Usmani

    Mufti Muhammad Zubair Usmani completed his Doctorate in Islamic Finance form Karachi University. He is also the Fazil Takhassus (specialist of Islamic Fiqh and Fatawa) from Jamia Darul Uloom Karachi and is also a research scholar and teacher.

    Besides being the Shari’ah Advisor, Muslim Commercial Bank; he is also the member Transformation Commission Sub-committee, State Bank of Pakistan; Islamization of Economic Committee Chamber of Commerce, Karachi; Implementation of Supreme Court Judgment on Riba Committee, Institute of Chartered Accountant of Pakistan and governing body Al-Markaz-ul-Islami, Dhaka, Bangladesh.

    Sheikh Essam Ishaq

    Sheikh Essam M. Ishaq graduated in Political Science from McGill University, Montreal, Canada. Currently he is teaching Fiqh, Aqeeda and Tafseer courses in Bahrain. He holds the position of Shariah Advisor at Discover Islam, Bahrain and is on the Board of AAOIFI as well as First Islamic Investment Bank.

    Sheikh Al-Siddiq Mohamed al-Darir

    Sheikh Al-Siddiq Mohamed al-Darir of Sudan is one of the leading Islamic Finance scholars of today. He serves as the head of the Shariah Board at Faisal Islamic Bank of Sudan and Methaq Islamic Insurance Company. He is also a member of the Shariah Council of AAOIFI. He lives in Khartoum, Sudan, where he Dean of the Faculty of Law at Khartoum University.

    Sheikh Abdulla Ibn Sulaiman al-Manea

    Sheikh Al-Manea of Saudi Arabia is a member of the Shariah Council of AAOIFI. He also serves on the Shariah Boards of Alahli Takaful Company, HSBC, SABB Takaful and others. He is a former judge of the Court of Cassation of Saudi Arabia.

    Sheikh Abdel-Rahman Ibn Saleh Al-Atram

    Sheikh Al-Atram of Saudi Arabia is chairman of the Shariah Board of Al-Rajhi Investment Corporation and is a member of the Shariah Council of AAOIFI. He has written numerous legal verdicts in his capacity as Shariah Advisor.

    Dr. Abdulaziz Khalifa Al Qassar

    Dr. AbdulAziz Al-Qassar is a Kuwaiti national holding a Bachelor’s degree in Shari’a from the University of Kuwait, a Masters degree and a PhD degree from the Al-Azhar University in Islamic Jurisprudence (Fiqh). He is currently an assistant professor of the Shari’a College at Kuwait University.

    Dr. AbdulAziz is a member in the Shari’a Board of many Islamic financial institutions and banks around the world.
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."



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    General Guide Lines - Income from non- Shariah compliant investments

    1. Total investments in non-Shariah compliant business are calculated for each company
    and are divided by Total Assets. The resulting ratio should not exceed 33%.

    2. If money needs to be invested in a company that deals mainly in halal but also receives
    revenues from side businesses that could be haram, than it should be done with the
    firm intention to inform in written and also orally, if possible even in their annual
    meetings that the company should not do any haram business generally and particularly
    with this investment.

    3. The Shareholder/investor needs to check the yearly balance sheet of the companies to
    determine to what percentage haram income was received. Based on this he has to give
    an equal percentage of his profit into charity.

    4. All Incomes from non Shariah Compliant Investments are summed and their ratio to
    gross revenue (Gross Sales + Other Income) is calculated. This ratio should be less than
    or equal to 5%.

    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."



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    Fatwa : Trading in the Shares of Companies with Shariah-Compliant Core Businesses that Are Involved in Riba-Based Transactions with Conventional Banks


    After the presentation of research and after discussions regarding the purchase and sale of shares in joint stock companies whose core businesses are Shari'ah-compliant but which are involved in riba-based transactions with conventional banks, the Forum has arrived at three conclusions.

    The First View

    Investing money in such companies is not permissible, as it involves an element of riba. Riba is prohibited, regardless of whether the proportion of loans given or taken is a small or large percentage of the invested wealth, and regardless of whether such loans were engaged during the establishment of the companies or after.This is because, according to the contract of the company, every stockholder assigns the administrators of the company to act as his/her agents, and, according to the Shariah, the acts performed by an agent are considered to be acts of the one who appointed him. And the scholars have explicitly stated that it is not permissible to be involved in contracts that include unlawful elements or that have unlawful consequences.

    The Second View

    Investing wealth by buying, selling and trading stocks is basically lawful; however riba may enter into such activities. Joint stock companies are a new business format, for they did not in exist during classical times. Due the following considerations, it is sometimes permissible to invest in such companies:

    1. Although such companies are partnerships, there are particularities that distinguish them from the partnerships known to the classical scholars. This is because the individual shareholder has little power, as most actions and decisions are collectively taken. Hence, it is not entirely accurate to characterize a shareholder as the principal who has made the company administrators his/her agents, such that he/she has the power to confirm their role, rescind their agency or nullify their transactions. This is a new form of agency (wakalah), and not all of the rules for classical wakalah apply to it.

    2. For companies whose core business does not involve unlawful elements, involvement in riba-based transactions with conventional banks is a subject requiring further research. It is considered a subsidiary flaw and not a principal one. To further elucidate this matter, we can refer to the Islamic legal maxim that states, "Things can be excused in subsidiary matters that are not excused in principal matters." Furthermore, the usury-tainted elements are a small percentage of the activities of the companies.

    3. In this era, joint stock companies have become a widespread public need, especially for those who do not possess the capabilities to engage in investments with minimum risks. Widespread public need is given the same legal weight as dire necessity in the Shariah. This case falls under the auspices of the legal maxim that says: faced with a choice between two evils, one must choose the lesser of them. This is because there is a scarcity of companies that are truly compliant with the rules of the Shariah.

    4. The scholars who have permitted the participation in such companies have stipulated a further condition, i.e. the investors must purify the profit earned by expending the illicit portion in charity or for the public good. They should also strive to change the activities of the company toward Shariah compliance, each person in proportion to his capacity. In addition, precautionary rules should be in place to confirm that the portion of interest involved in those transactions really is minor.

    5. It must also be confirmed that the actual assets and benefits of the companies are greater than the debts.

    Third View

    It is permissible to participate in such companies if their activities are conducted for the public interest, i.e. [to provide a good or service that] all or a majority of the people need. It is also permissible to buy, sell and trade the shares of such companies, if the purpose of trading it is to earn profit from the value of the share and not from quarterly dividends, keeping in mind the Shariah rules that govern trading in company shares that were mentioned in the second view.

    Issuer:Fifth Fiqh Forum, Kuwait Finance House, 15-13 Rajab Hijrah, 2 – 4
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."



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    Mixed Companies



    A mixed company is one where its core activities are permitted by Shariah, although there are some other activities that may contain a small extent of prohibited elements. For mixed companies, the SAC carries out an analysis with additional considerations before including these companies in the list of Shariah-compliant securities. These considerations are–

    (a) the core activities of the company must be activities which are not against the Shariah principles as outlined in the
    four primary criteria (that were explained earlier). Furthermore the haram element must be very small compared to
    the main activities;
    (b) public perception of the image of the company must be good; and
    © the core activities of the company have importance and maslahah (benefit in general) to the Muslim ummah and the
    country, and the haram element is very small and involves matters such as `umum balwa (common plight), `urf
    (custom) and the rights of the non-Muslim community which are accepted by Islam.


    The Involvement of Muslims in the Purchase of Equity

    The existing structure of a company enables its majority shareholders to control it. This means that Muslims can control a company by being the largest shareholders of the company. This is a strategic and important matter that needs to be understood by the Islamic community. At the same time, a question that will possibly arise is that the transfer of the company’s control to Muslims may not necessarily solve the problem of prohibited activities. Sometimes, even though the ownership of the company has changed hands, the prohibited activities still carry on. This depends on the extent of the Muslim community’s observance of the religion’s commandments and prohibitions, and the presence of fasad al-zaman.335

    The question of having prohibited activities in a company is not something new. In fact, it has been discussed by contemporary Muslim scholars likeAl-Khayyat. He gives the example for riba, where certain companies arei nvolved in contracts with riba for business transactions conducted by the company’s management. He separates the practice of riba by the company’s management from the company’s main activities. The sins are therefore borne by the company’s management as they are not part of the company’s main activities.336 Nevertheless, the prohibited status of the company is clear if the core activity is prohibited, like riba-based financial services, gambling, production of liquor, etc.

    Situation of Mixed Companies

    A question arises when a company’s core activity is permissible but at the same time it has other prohibited activities. For example, a big company whose core activity is the production of industrial goods, but has a subsidiary company whose activity involves riba. This activity occurs within the company’s group, and provides loans to the subsidiaries and the holding company as a source of financing for their business activities.

    An example of another mixed company is a large company whose core activity is real estate but which has a subsidiary company that operates a hotel or resort where liquor is sold within its premises. What is the status of this company according to Shariah? Is the core activity which is more significant not taken into consideration to permit Muslims to invest in the company? Whereas the permissible activity benefits the public much more compared to the prohibited activity which has minimal benefits.

    The form of prohibited activity in the first case is more for financing the company’s purchase of machinery, equipment and others. The form of prohibited activity in the second company is to provide a service to non- Muslims.

    Opinions of Past Islamic Jurists

    There are some discussions by Islamic jurists in classical works on Islamic jurisprudence which are related to the issue of mixed companies. The discussion looked at the status of companies jointly owned by Muslims and non-Muslims. They touched on a situation where the non-Muslim partners carry out riba-based activities and trading of liquor, which are prohibited for Muslims. Nevertheless, Islam recognises the rights of the non-Muslims. Islam classifies this matter as mal for them.337 Islam has also ruled that its followers cannot damage or violate the assets of the non-Muslim community even when the said assets are prohibited for Muslims. Due to the existence of such a situation, there are different views among past Islamic jurists with regards to permitting the establishment of such a company in Islam.

    The next issue also addressed by the Islamic jurists concerns companies owned by Muslim partners but where one partner carries out a prohibited activity, for example, riba. The situation comes about because this partner is not that observant about religious and moral practices. A matter such as this also gives rise to a difference of opinion among the past Islamic jurists because it was related to the principle about a person’s sins not being transferable to another and also the principle of muamalat transactions being generally permissible. It means that we are allowed to practise muamalat among fellow Muslims who may be faithful or fajir338 or between Muslims and non-Muslims or vice-versa.

    The past Islamic jurists did not make religion a condition for incorporating a company except when it concerns a mufawadhah company.339
    Group of Islamic Jurists That Permit Mixed Companies

    Some Islamic jurists believe that it is permissible for Muslims to partner non-Muslims in business, although it is not encouraged. The Islamic jurists were from the Syafi`i Mazhab, and some from the Hanafi, Maliki and Hanbali Mazhab.340 Their arguments were based on qiyas where both partners qualify to become official representatives. Thus they should run the mufawadhah company complying with how the mufawadhah company was formed between the Muslim and non-Muslim. Subsequently, both parties (Muslim and non-Muslim) qualify to carry out the work of the company on their own, even though they both differ on what is permissible and prohibited in carrying out an activity. According to the Islamic jurists, Muslims cannot carry out prohibited activities, such as those connected with riba and liquor trading, while there are no restrictions on the non-Muslims. The same religion need not be present in a mufawadhah company. Islam allows a mufwadhah company to be formed between Majusians and the kitabis (Jews and Christians) although the religions of both parties differ. Majusians worshipped fire and their altar was considered mal, whereas the kitabis did not have the same practice.341

    Group of Islamic Jurists That Prohibit Mixed Companies

    Imam Hanafi and Muhammad were from among the early generation of the Hanafi Mazhab who did not believe it was permissible for Muslims to collaborate with non-Muslims through mufawadhah. This was because Islamic and non-Islamic activities differ. What was permissible for non-Muslims was considered mal such as liquor and pork, which were prohibited for Muslims.

    Rationale Permitting the Inclusion of Mixed Companies in the List of Shariah-compliant Securities

    Views of Many Islamic Jurists Permitting

    Based on the views of many Islamic jurists,342 the approach towards permitting Muslims to invest in the shares of companies with a mix of permissible and prohibited activities is justified. This is because the esteemed Islamic jurists did not prohibit such companies when evaluating the status of companies jointly owned by both good Muslims and fajir Muslims, even though the companies were later found to carry out prohibited activities, such as riba and the sale of liquor.

    Past Islamic jurists also discussed the issue of funding from both permissible and prohibited sources. The majority of the Islamic jurists allowed such transactions involving permissible and prohibited funding, provided the ratio of permissible funds is more.

    Izz al-Din bin Abd Al-Salam said:

    Meaning: “If the permissible money is more, that is, one dirham of prohibited money is mixed with one thousand of permissible money,then the transaction is allowed.”343

    Al-Kasani also said:

    Meaning: “Everything will be tainted by what is prohibited, but if the larger part is halal, then trade is allowed.”344

    Ibnu Taimiyyah also gave the same view with regards to funds where permissible and prohibited assets are mixed:

    Meaning: “Should the permissible be more, then a business transaction will not be judged as prohibited… and should one’s wealth be found to have a mixture of the permissible and prohibited, then the permissible element will not be prohibited; on the contrary, the owner is allowed to take according to the permitted ratio.”345

    Islamic Jurisprudence Accepts the Reality of Gharar Yasir and Ghabn Yasir

    Gharar346 and ghabn347 are two negative elements that can ruin a contract. However, should it occur in a small amount, Islamic jurisprudence considers it normal and will not adversely affect the contract’s goodwill. In other words, the miniscule presence of these two negative elements in a contract is excusable. The same situation can happen in a mixed company where the permitted activity is more than the prohibited activity. Therefore, the nature of such a company is within the permissible bounds of the Islamic jurisprudence and is excusable.

    The Principle of `Umum Balwa

    Most of the small prohibited matters in today’s business transactions can be categorised as `umum balwa.348 Such matters, as earlier explained, are included among those matters excusable under Islamic jurisprudence.

    The Principle of al-Dharuriyat al-Khamsah

    With reference to the masalih dharuriah,349 Syara` has listed hifz al-mal350 as a masalih dharuriah that must be regarded very seriously. The question of the Muslims’ economic strength and integrity is an important factor in the continuity and progress of Muslims. Large companies whose core activity is permissible, should not be cast aside by Muslims just because there is a small number of activities that do not comply with the Shariah requirements. If Muslims are involved in these companies, they can concentrate their capital in permissible activities that outweigh those which are prohibited. Besides, this will benefit Muslims as they can participate in the economy, especially in companies that are important and strategic to them.

    Change in Hukm (Ruling) Due to Change in Human Behaviour

    Changes in environment and location greatly affect the consistency of rulings through the ages. This is because Islam is a religion that is suitable for meeting human needs at any time and any place. To meet these demands, changes in rulings always take place. Every ruling that is endorsed has a specific aim in meeting the call for justice, obtaining maslahah, and averting damage and destruction. Apart from the factors of time, place and environment, the change in ruling is also related to the changing morality of Muslims. Based on the history of Islamic jurisprudence, there were many rulings that were amended due to changes in time, place and environment. The Islamic jurisprudence states a maxim of Islamic jurisprudence as follows:351

    Meaning: “It cannot be denied that a change in ruling is caused by a change in time.”

    Even then, changes are confined to rulings that are ijtihadi in nature.

    A ruling can change as a result of a lack of abstinence and weak adherence to religious commandments as a whole at a place or what is known as fasad al-zaman. Besides that, a ruling can also change due to changes in the economic system or what is known as asalib iqtisadiyah because if rulings do not change with the times, it ceases to be practical. As a result, the lack of
    changes will make the Shariah appear static and obsolete because it cannot cope with the prevailing needs, whereas according to Imam Al-Syatibi, nothing is purposeless in Shariah.352

    An example of a change in ruling as a result of a change in environment for Muslims is provided by the ruling concerning the payment for teaching the Quran. The early generation of past Islamic jurists ruled that no payment should be given for teaching the Quran and religion. However, with changing times, such duties were required to be appropriately paid. Without such payment, religious education would be neglected because no one would be interested to teach. As a result, nobody would have a deep knowledge of the Quran and the religion, because specialist knowledge would not be available. Because of this, the Islamic jurists later took the approach of permitting the acceptance of payment, which was originally not permitted, in line with the changing times and environment.353

    The reason for deciding on a ruling that differs completely from its original ruling, that is from not permitting to permitting, is so that the religious maslahah will continue to be preserved. If the ruling is not updated in line with the changing times and environment, religious study and its propagation would almost certainly be completely neglected. This contradicts the requirement of the Shariah which wants such noble efforts to continue. Thus, maintaining an old ruling which has no maslahah is contradictory to Shariah principles.

    Response to Views Disputing the Permissibility of MixedCompanies

    There are parties opposed to the inclusion of a mixed company in the list of Shariah-compliant securities due to its non-compliance with the maxim which means that if the permissible is mixed with the forbidden, then it should be ruled as forbidden. They are of the view that such a mixed company should not be at all included in list of Shariah-compliant securities.

    It must be understood, however, that there are strong arguments to rebut the above viewpoint, as follows:

    (a) Weakness of the maxim

    The authenticity of the above maxim is also disputed. It cannot be denied that this maxim is suitable for certain cases, such as the mixing of slaughtered animals carried out by Muslims and the Majusi but it is not suitable in the case of mixed companies. Al-Sayuti mentions that this maxim is based on a hadith of the Prophet s.a.w.:

    Meaning: “Where there is a mix of the permissible and the forbidden, then it becomes forbidden.”

    However, Islamic scholars debated on the status of this hadith. According to al-Hafiz Abu Al-Fadhl al-`Iraqi, this hadith is of unknown origin. Meanwhile, al-Subki quoted al-Baihaqi that the hadith was conveyed by Jabir Al-Ja`fiy, someone of weak status who had conveyed it from al-Sya`biy who, in turn, conveyed it from Ibn Mas`ud in the form of a munqati` (hadith of a broken reporting sequence);354

    (b) Existence of an opposing maxim

    There is an opposing maxim mentioned in Al-Asybah355 at the end of the discussion of the maxim . The maxim concerned is which means: “That which is forbidden does not render forbidden that which is permissible.” This maxim was formulated based on the hadith warid found in Sunan Ibn Majah and Al-Darqutniy conveyed from Ibn Omar; and

    © Maslahah

    Apart from the weakness of the maxim stated above, maslahah is also a strong argument for permitting mixed companies. It is further strengthened by arguments pertaining to the existence of the `umum balwa, fasad al-zaman, `urf, asalib iqtisodiyyah situations and the recognised rights of non-Muslims.

    Because of that, the maxim as presented by Izz al-Din `Abd al-Salam356 regarding the mix of good and bad should be applied:

    Meaning: “Where there is good and bad together, then it needs to be reviewed…”

    If such an action is taken, and hopes of achieving good are more positive, and the disadvantage can be overcome and averted, then such an action should continue. This takes into consideration the command of ALLAH s.w.t.:

    Meaning: “So fear ALLAH s.w.t. as much as you can…” (Surah al-Taghabun: 16)

    On the contrary, if the bad cannot be overcome and the good cannot be obtained because the bad outweighs the good, then the decision not to proceed with the planned action is wiser to avoid the bad.

    To determine the status of a mixed company as a Shariah-compliant company/ securities, it is necessary to draw up specific benchmarks to ensure that prohibited elements are minimal and related to those excused by Syara`. In other words, the presence of prohibited elements does not affect the permissible part which is larger and more important.

    The esteemed past Islamic jurists did not draw up a benchmark for determining the status of a mixed company. This, therefore, gives modern Islamic jurists the opportunity to think about such a benchmark.

    The SAC considered a number of benchmarks as a basis that can be considered as ihtiyat (precautionary measure) that gives caution in classifying a mixed company under the permissible category as stated by Ibnu Subki in al-Asybah wa al-Naza’ir, that is, “to rule as prohibited something that is a mix of the permissible and the prohibited is ihtiyat and it is not necessarily prohibited.”357

    The SAC took into account additional elements like maslahah, `umum balwa, `urf khas min asalib iqtisodiyah,358 fasad al-zaman and huquq ghair muslimin.359 The SAC also looked at numerous fatwa (religious edict from a qualified scholar) which have become exceptions to the maxim which means, if there is a mix of the permissible and the prohibited, then it is ruled as prohibited.

    For example, the mixing of slaughtered animals by Muslims and the Majusi is ruled to be totally prohibited.360 This fatwa is in line with the maxim because such a mixed item is prohibited in essence. Whereas if the essence of such an item is not prohibited, but is prohibited for other reasons, then it needs to be scrutinised differently.

    Ibnu Qayyim in his Bada’i` al-Fawa’id361 divided the nature of prohibited assets
    into two groups:

    (a) Prohibited because of its zat (nature), for example liquor, pork, etc. This relates to the case of mixing slaughtered animals mentioned earlier;and
    (b) Prohibited due to other reasons, for example, the means by which money is earned is prohibited. Money, in essence is not prohibited, but if money is obtained as a result of theft, robbery, cheating, etc.;

    then this money is prohibited. This is similar to the securities of a mixed company, because securities in essence is not prohibited. It becomes prohibited because the activities of such companies produce profits which can be distributed through dividends.

    An exceptions to the maxim is, for example, the fatwa concerning silk mixed with common thread. Silk cloth is prohibited to be worn by men as in the hadith of the Prophet s.a.w.:

    Meaning: “The Prophet s.a.w. took a piece of silk and placed it on his right. He took some gold and placed it on his left. Then he said: Both these things are prohibited unto men among my followers, but permissible for the women.”362

    However, it can be worn by men if the ratio of silk thread mixed with the common thread does not exceed 50%. The benchmark concerning such a mixture is 50%. In other words, if the mixture of silk does not exceed 50%, the cloth may be worn by men. The question is whether such a benchmark is suitable for application in the context of mixed securities. However, from the viewpoint of asset characteristic, both cases are essentially similar, as they appear to be assets that are not prohibited in essence.

    Benchmark of One-third

    The Prophet s.a.w.’s condition of 1/3 (33.33%) is a very generous limit which can also be considered for use as the benchmark for mixed companies. This statement can be supported by the legacy of Sa`ad Ibn Abi Waqas who wanted to leave his assets as alms as in the following hadith:

    Meaning: “One day, the Prophet s.a.w. visited Sa`ad bin Abi Waqaswho was ill. Sa`ad expressed to the Prophet s.a.w. his feelings that his illness was entering the last phase and that death was near. He asked for the Prophet s.a.w.’s opinion on giving his assets away as alms for he had only one daughter to inherit his wealth. Therefore, he wished to give as alms 2/3 of his property. However, the Prophet s.a.w. stated his objections. Then Sa`ad asked whether he could give away 1/2 of his property. The Prophet s.a.w. still said no. The Prophet s.a.w. then said: 1/3 (of Sa`ad’s property to give away as alms) is enough, that too is still too much. Verily, to leave your heir wealthy is far better than to leave you heir impoverished and dependant on other people’s charity.”363

    Based on the Prophet s.a.w.’s words, 1/3 or 33.33% “is enough” and can be used as a guideline for the basis of formulating a benchmark. The question is whether this benchmark is suitable to be used for mixed companies, because it relates to the bequest of property and giving of alms. Even so, it cannot be denied that it can be used as a benchmark to set the upper limit of a mixture because an amount exceeding the percentage set will be considered excessive.

    Benchmark Based on Ghabn Fahisy

    The practice of ghabn fahisy364 in trading is not allowed in Islam. However, if the ghabn is small then it is excused. The meaning of ghabn is making profits which exceeds market price. The theory of ghabn fahisy describes gains which exceed the market price achieved through cheating. If ghabn happens without any act of cheating, then it is permitted.

    The activity of tanajusy,365 that is manipulation, if accompanied by the element of ghabn fahisy can give buyers the right to cancel the sale and purchase contract, according to the majority of Islamic jurists from the Maliki, Syafi’i and Hanbali Mazhab.366 This shows that if ghabn fahisy is accompanied by the element of tanajusy, then it is not permissible. However, if it occurs below the benchmark, it is excused. The Hanafi Mazhab ruled that the upper limits for ghabn fahisy are as follows:

    (a) 5 per cent for ordinary goods;
    (b) 10 per cent for animals, including those used for riding; and
    © 20 per cent for fixed assets.
    Quran 2:32. "Glory be to ALLAH, we have no knowledge except what You have taught us. Verily, it is You, the All-Knower, the All-Wise."

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