Index

RESOLUTION NO. 102(5/11)

ON CURRENCY TRADING

Quote-The Council of the Islamic Fiqh Academy, emanating from the Organization of the Islamic Conference, in its 11^th session held in Manama, Bahrain, on 25-30 Rajab 1419H (14-19 November 1998),

Having examined the research papers presented to the Academy in connection with the issue of “Currency Trading” and having listened to the discussions which took place about this subject,

RESOLVES

First:  Confirming the Academy’s Resolution No. (21/9/3) in respect of banknotes and the change in the value of currency, Resolution no. (63/1/7) in respect of stock exchanges, paragraph (three): trading in commodities, currencies and indexes of organized markets, Resolution on trading in currencies and Resolution no. 53(4/6) in respect of receipt of money, paragraph(Two): (1-c).

Second: It is not permissible in Shari’a to sell currencies by deferred sale, and it is not permissible, still, to fix a date for exchanging them.  This is evidenced in Qur’an, Sunnah and Ijma’ (the consensus of the Muslim Ummah).

Third: Riba (usury), trading in currencies, and exchange of currencies that do not comply with the principles of Islamic Shari’a are among the most important reasons for the financial crises and economic fluctuations which have gripped some countries.

RECOMMENDATIONS

The Islamic Fiqh Academy, makes the following recommendation:

·It is incumbent upon Muslim governments to exercise control over money markets and oblige them to regulate their activities, which are carried out in currencies and other transactions, in accordance with the principles of Islamic Shari’a, because these principles are the safety valve against economic disaster.

May Allah’s prayers and blessings be upon our Prophet, and upon his family and Companions – Unquote

Resolution No. 63/1/7

CONCERNING  FINANCIAL MARKETS

Quote - The Council of the Islamic Fiqh Academy holding its Seventh session in Jeddah, Kingdom of Saudi Arabia, from 7 to 12 Dhul Qi’dah 1412H (9-14 May 1992).

Having considered the research papers received by the Academy on the subject:
“Financial Markets, Shares, Options, Commodities, Credit Cards”.

Having listened to the discussions held about it,

RES0LVES

First:  SHARES

1.      Participation in stock companies

a)      Since the essential thing about transactions is their licit nature, the establishment of a joint stock company with unprohibited purposes and activities is permissible.

b)      There is no disagreement as to the prohibition of participation in joint stock companies whose main purpose is a prohibited activity such as transactions with Riba (Usury), production of, or traffic in, prohibited products.
c)      The basic principle is the prohibition  of participation in companies that deal at times in prohibited things such as Riba etc. even though their main activities are permissible.

2.      Underwriting

Underwriting is an agreement made upon establishment of a company with someone who undertakes to guarantee the sale of all or part of the shares issued, i.e. to undertake to subscribe for all shares that remain unsubscribed by others. There is no Shari’a objection to this provided that the obligee subscribes to the shares at nominal value without any compensation or the commitment per se though the obligee may receive compensation for work other than the underwriting that he may carry out such as preparation of studies or marketing of shares.

3.      Spreading out payment of the Share Value upon subscription

There is no Shari’a objection to partial payment of the value of the subscribed share and to deferred payment of the remaining installment(s) for this may be considered as participation with down payment and commitment to capital increase.  This does not involve any prejudice since it applies to all shares and the company’s liability to third parties covers entirely the declared capital, this being the amount which the company clientele have been informed of, and satisfied with.

4.      Bearer Shares

Since the sale of a “bearer share” involves a unidentified portion of the company assets, and the share certificate is a document which attests to entitlement to the said portion, there is no objection in Shari’a to the company issuing and circulating shares in this manner.

5.      Object of the contract in the Sale of Shares

The object of the contract in the sale of Shares is the unidentified portion of the company assets and the share certificate is a document attesting to entitlement to the said portion.

6.      Preference shares

It is not permissible to issue preference shares with financial characteristics that involve guaranteed payment of the capital or of a certain amount of profit or ensure precedence over other shares at the time of liquidation or distribution of dividends.  It is however, permissible to give certain shares such characteristics as related to procedural or administrative matters.

7.      Dealings in Shares Through Riba Means

a)      It is not permissible to purchase a share with an interest bearing loan offered to the purchaser by the broker or any other party against pawning of the share as this involves Riba (usury) deal consolidated by hypothecation, both acts being expressly forbidden since “the eater, the sever, the scribe and the witness of Riba shall be accursed”.

b)      Nor is it permissible to sell as share that the seller does not possess but has received a pledge from the broker to be loaned the share at the time of delivery income such a deal falls within the framework of sale of something that the seller does not own. The interdiction shall be more categorical if the deal is conditional upon payment of the share price to the broker who would then benefit by depositing this price with interest in order to obtain compensation for the loan.

8.      Sale or Pawning of Shares

It is permissible to sell or pawn a share subject to the provisions of the company statute such as the possible allowance therein for sale whether free or conditional upon giving priority of purchase to long-standing shareholders.  Similarly, the text of the statute should be considered for the possiblity of pawning shares with partners at the rate of the common share.

9.      Issue of Shares Charged with Issue Fees

The addition of a certain percentage to the value of the share to cover the issue expenses raises no objection in Shari’a as long as the estimated percentage is reasonable.

10.     Bonus issue and discount issue

It is permissible to issue new shares to increase the capital of the company if the issue is made at real value of the shares (in accordance with expert appraisal of the company assets) or at market value.

11.     Company Guarantee of share Redemption

The Council RESOLVES to defer the ruling on this subject to a future session pending further research and consideration.

12.     Limiting the Liability of a Joint-Stock Company

There is no objection in Shari’a to setting up a company whose liability is limited to its capital for that is known to the company clientele and such awareness on their part precludes deception. Nor is there any objection in Shari’a to the fact that the liability of some shareholders to the creditors is unlimited without compensation for such a commitment.  That is the case for companies which include acting partners and limited partners.

13.     Limiting the negotiation of shares to authorized brokers and stipulation of fees for doing business in the stock markets.

It is permissible for competent official quarters to regulate the negotiation of certain shares through licensed specialist brokers exclusively for that is an official procedure which serves legitimate interests.

It is also permissible to stipulate membership fees for transacting business in the financial markets as this is an organizational matter designed to serve the said legitimate interests.

14.     First Right

The Council RESOLVES to defer the ruling on this subject to a future session pending further research and consideration.

15.     Title Deed

The Council RESOLVES to defer the ruling on this subject to a future session pending further research and consideration.

II  OPTION SALE

a)      Form of Contract

The purpose of option contracts is to permit withdrawal of a commitment to sell or buy something specific and described at a definite price during a given period or at a given time either directly or through an organization which guarantees the rights of the two parties.

b)      Shari’a Ruling Thereon

Option contracts as currently applied in the world financial markets are a new type of contracts which do not come under any one of the Shari’a nominate contracts.

Since the object of the contract is neither a sum of money nor a utility or a financial right which may be waived, then the contract is not permissible  in Shari’a.

As these contracts are primarily prohibited their handling is also prohibited.

III-DEALING IN COMMODITIES CURRENCIES AND INDICES IN ORGANIZED MARKETS

1-      Commodities

Commodity transactions in the organized markets are carried out in accordance with one of the four following modes:

First mode

The contract  provides or the right  (for the buyer) of immediate delivery of the merchandise sold and immediate payment (to the seller) of its price and the commodities or receipts representing them are available in the permission of and held by the vendor.  This contract  is permissible in Shari’a under the well-known conditions of sale.

Second mode

The contract provides for the right to immediate delivery of the commodities sold and immediate payment of their price and for the possibility of carrying out these two actions with the guarantee of the market authority.

This contract is permissible in Shari’a under the well-known conditions of sale.

Third mode

The contract provides for the delivery of described and secured merchandise at some future date, and payment of its price on delivery.  It also stipulates that it shall end with the actual delivery and receipt of the merchandise.

This contract is not permissible because of the deferment of the two elements of the exchange.  It may be amended to meet the well-known conditions of “salam” (advance payment).  If does so, it shall be permissible.

Moreover, it is not permissible to sell a merchandise purchased under “Salam” terms with advance payment, unless the merchandise has already been received.

Fourth mode

The contract provides for the delivery of a described and secured merchandise at some future date, and payment of its price on delivery.  The contract, however, does not stipulate that it shall end with the actual delivery and receipt of the merchandise, and thus it may be terminated by an apposite contract.

This type of contract is the most prevalent in the commodity markets.  It is not at all permissible.

2.      Dealing in currencies

Currencies transactions, in the organized markets, are carried out in accordance with one of the four modes indicated above for the commodities.

Purchase and sale of currencies are not permissible through the third and fourth modes.  They are however, permissible through, the first and second modes subject to fulfillment of the well-known exchange requirements.

3.      Dealing Indices

An index is a figure calculated according to a special statistical method and designed to indicate volume of variation in a given market.  It is the object of transactions in a number of world markets.

Sale and purchase of the index are not permissible for they are pure gambling and constitute the sale of something fictitious (something that does not exist)

4.      Shari’a alternatives to prohibited transactions in commodities and currencies.

It is necessary to organize an Islamic commodity and money market based on Shari’a stated transactions in particular “bay as-salam” (advanced payment sale), “as Sarf”(exchange), “wa’d bill bay” (commitment to sell at a future date), “istisna” (industrial production order), etc.

The Academy deems it necessary to make an exhaustive study of the terms of those alternatives along with their modes of application in an organized Islamic market.

IV  CREDIT CARD

The credit card is a document given by its issuer to a mutual or a juridical person on the basis of a contract between them enabling it to buy goods or services from  vender who approves the document, without paying the price immediately as the document includes the issuer’s commitment to pay.  Some types of this document make it possible to draw cash from the banks.  Credit cards are of different kinds:

A.      For some of them, the drawing or payment is made from the holders account in the bank and not from the issuer’s account, and is therefore covered.  For other’s the payment is made from the issuer’s account and is charged back to the holder at periodic internals.

B.      Some cards impose usurious interests on the balance which remains unpaid during a specified period after due date.  Others do not impose any interests.
C.      Most of the credit cards charge an annual fee to the holder while for others no annual fee is charged by the issuer.

After deliberations, the Council has decided to defer final consideration of this card’s conformity to Shari’a and the ruling thereon to a future session pending further research and study.

Allah is Omniscient.- Unquote

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