In the Name of Allāh,

the Entirely Merciful, the Especially Merciful

Praise is due to Allāh, Lord of the worlds, may the blessings and peace be upon our master Muḥammad, the last of prophets, on his family, and all his companions.

Resolution No. 63 (1/7)

Financial Markets

(Shares, Options, Commodities, and Credit Cards)

The Council of the International Islamic Fiqh Academy of the Organization of the Islamic Conference, holding its 7th session in Jeddah, Kingdom of Saudi Arabia, on 7–12 Dhū al-Qi’dah 1412h (9–14 May 1992),

Having examined the research papers submitted to the Academy concerning

Financial Markets (Shares, Options, Commodities, Credit Cards), Having listened to the discussions on the subject,

Resolves

First: Shares

1. Acquisition of Shares in Companies:

   1. Since lawfulness is the primary judgment regarding transactions, creating a joint-stock company with permissible purposes and licit activities is also lawful.
   2. There is no legal disagreement on the prohibition of participating in companies whose main purpose is haram, such as engaging in Ribā- based transactions, forbidden products, and trading them.
   3. Prohibition is the primary judgment regarding participation in joint-stock companies that may sometimes engage in prohibited transactions such as Ribā-based transactions, even though their main activities may be lawful under Shariah.15
2. Underwriting:

Underwriting is an agreement made upon the establishment of a compa- ny 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 Shariah prohibition to this provided

15 Resolutions no. 77 (8/8) and no. 87 (4/9).

that the obligee subscribes to the shares at nominal value without any compensation for the commitment per se though the obligee may receive compensation for work other than the underwriting – that he may carry out such as studies or marketing shares.

3. Payment in Installments of the Share’s Value at the Time of Underwriting:

There is no Shariah prohibition to the partial payment of the value of the subscribed share and to deferred payment of the remaining installment(s) as it may be considered as participation with down payment and com- mitment to capital increase. This does not involve any prejudice since it applies to all shares in the company’s liability to third parties and covers the declared capital entirely, this being the amount that the company clientele has been informed of and satisfied with.

4. Bearer Shares:

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

5. Contract Object 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. Premium Shares:

It is not permissible to issue premium shares with financial priveleges 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 priveleges relating to procedural or administrative matters.

7. Trading Shares by Means of Ribā:

   1. It is not permissible to purchase a share with an interest-based loan offered to the purchaser by the broker or any other party against pawning of the share as this is involves a ribā (usury) transaction and its consolidation by mortgage, which are clearly forbidden by the ḥadīth “the eater, the agent, the clerk and the witness of Ribā shall be ”

1. It is also not permissible to sell a 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 since such a deal falls within the framework of selling something that the seller does not The prohibition shall be more categorical if the deal is conditional upon the payment of the share price to the broker who would benefit by depositing this price with interest 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 statutes, such as the possible allowance therein for sale, wheth- er free or conditional upon giving priority of purchase to long-standing shareholders. Similarly, the statutes should be considered for the possibil- ity of pawning shares with partners at the rate of the ordinary share.

9. Issuance of Shares with Issuance Fees:

Adding a certain percentage to the value of the share to cover the issuance expenses is not subject to a prohibition in Shariah as long as the estimat- ed rate is reasonable.

10. Bonus Issuance and Discount Issuance:

It is permissible to issue new shares to increase the company capital if the issuance is made at real value of the shares, based on experts’ estimation of the company assets or at market value.

11. Company Guarantee of Share Repurchase:

The Academy resolved to postpone the adoption of a resolution on this subject until a future session, pending further research and examination.

12. Determining the Liability of a Limited Joint-Stock Company:

There is no prohibition in Shariah to creating a joint-stock company with a liability limited to its capital, for that is known to the company’s clien- tele and this awareness on their part excludes uncertainty. Nor is there any prohibition in Shariah to the fact that some shareholders’ liability to the creditors is unlimited without compensation for such a commitment, which is in the case for companies with both acting partners and limited partners.

13. Limiting Shares Trading to authorized Brokers and Stipulating Fees to enter their Markets:

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

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

14. Priority Right:

The Academy resolved to postpone the adoption of a resolution on this subject until a future session, pending further research and examination.

15. Property Right Certificate:

The Academy resolved to postpone the adoption of a resolution on this subject until a future session, pending further research and examination.

Second: Options

1. Form of Options Contract

The purpose of an options contract is to permit withdrawal of a commit- ment 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 entity that guarantees the two parties’ rights.

2. Shariah Rulings

As currently applied in the global financial markets, options contracts are a new type of contracts that do not fall under any one of the Shariah 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 permissi- ble, according to Shariah.

Since these contracts are initially not permissible, neither is their trading.

Third: Dealing in Commodities, Currencies, and Indices in Or- ganized Markets

1. Commodities:

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

First mode: The contract stipulates the right (of the buyer) to the imme- diate delivery of the merchandise sold and immediate payment (to the seller) of its price, and the commodities or receipts representing them are available with the permission of and held by the vendor. This contract is permissible in Shariah with the well-known conditions of sale.

Second mode: The contract stipulates the right to the 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 Shariah with the well- known conditions of sale.

Third mode: The contract provides for delivering a described and se- cured merchandise at some future date, and payment of its delivery price. It also stipulates that it shall end with the actual delivery and receipt of the merchandise.

This contract is not permissible in Shariah because of the postponement of the two elements of the exchange. It may be amended to meet the well-known conditions of Salam sale; and if it does so, it shall become permissible.

Moreover, it is not permissible to sell a merchandise purchased under Salam sale before its payment‚ unless the merchandise has already been received.

Fourth mode: The contract stipulates delivering a described and secured merchandise at a future date, and the payment of its delivery price. The contract, however, does not stipulate that it shall end with the actual de- livery and receipt of the merchandise, and thus it may be terminated by an opposite contract. This type of contract is the most prevalent in the commodity markets and it is essentially not permissible by Shariah.

2. Trading Currencies:

Currency transactions, in the organized markets, are carried out in accord- ance with one of the four modes mentioned 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 provided they meet the well-known currency exchange conditions.

3. Trading Indices:

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

Sale and purchase of the index are not permissible since they are pure gambling and constitute the sale of something fictitious (non-existent).

4. Shariah-compliant Alternatives to Prohibited Transactions in Commodity and Currencies

It is necessary to organize Islamic commodity and currency markets based

on Shariah-compliant transactions, notably bay as-salam (advance pay- ment sale), sarf (exchange), wa’d bi al-bay (promise to sell), istisna (pro- duction order), etc.

The Academy deems it necessary to make a comprehensive study of these alternatives’ terms and conditions as well as their application modes in the organized Islamic market.

Fourth: Credit Cards

1. Definition

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

• For some of them, withdrawal or payment is made from the cardholder’s account in the bank and not from the issuer’s account and is therefore covered. For others, the payment is made from the issuer’s account and is charged back to the holder at periodic
• Some cards impose usurious interests on the balance which remains unpaid during a specified period after due date. Others, also, do not impose any interests.
• Most credit card issuers charge an annual fee to the holder, while some other issuers do not charge any annual fee to its holder.

1. Shariah Characterization of Credit Cards

After discussions, the Academy resolved to postpone issuing a resolution concerning the characterization of this type of cards and its ruling in Shariah to a forthcoming session, pending further research and studies.16

Indeed, Allāh is All-Knowing.

• Resolution 96 (4/10).