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Published On:13 January 2021
Posted by Indian Muslim Observer

Equity Markets – Best Investment Option for Muslims

By Imtiaz Merchant

Muslims should take advantage of the boom witnessed in the Indian Equity markets and they should not get left behind in the economic growth that is being witnessed throughout the country and likely continue for years to come. India is one of the fastest growing nations in the world with the GDP growing over 7 % for 2017-18 and expected to grow above 8 to 10 in 2021 onwards.

To be part of the main stream of the economy and get equal investment opportunity, Equity stock markets (The Islamic way) provides the most cost-effective investment solution for the Muslims. Equity markets have proved that they are not only the most cost effective, transparent, liquid and conducive to small and big size investors as a means of investment, nonetheless history has also proved that it outperforms and gives better returns than all other asset classes where return on investments as the parameter considered. In the long term a developing economy, equity (stock) market always goes up and up. though volatility is not ruled, so considering the inherent benefits Muslims must invest in the Equity Market.


On the onset Investment in equity markets is Islamically permissible since it is based on Musharaka (Partnership) principle where the profit is earned with the risk of loss, where in profit and losses are shared (PLS). With Ulema’s (Islamic scholar) guidance and approval it is now possible to invest in regulated Equity markets, of course with some stipulated conditions, and in fact Investment in equity markets the Islamic way is probably the best and only option available for the Muslims in a regulated environment. The government body SEBI being liberal about shariah based investment makes more sense to invest in equity markets after having been approved by the Islamic Scholar.

Now we investigate the inherent advantage investments in equities the Shariah way have over other forms of structured investments.

Fixed Interest (Riba) Based Investments (Banks)

Fixed interest (Riba) based investments like the Saving Bank deposit, Bank FDR; Postal savings, Debentures, Bonds etc. are strictly prohibited in Islam. Allah says in the Holy Quran,‘O those who believe, do not eat Riba (usury or interest) multiplied many times. And fear Allah, so that you may be successful.’ (Holy Quran Al-Imran verse 130). Islam since inception has discouraged interest based fixed saving and withholding wealth, but it has encouraged Business& Investments. ‘Profit should be earned only with the risk of losses’, in equity investment the profit and loss are shared in proportion to the investments made. Thus, investment in equity market is in accordance to the Quran and Hadeeth injunctions.

Investment in Real Estate

Investment in Real Estate / Properties, although permissible in Islam but it has many disadvantages over equities. First, Equity Market is well regulated by SEBI and Real Estate market is not regulated by any institutions, unit size is concern, it is not possible for every individual to buy property since the investment involved is huge, whereas one can invest in equity for an amount as low as Rs. One thousand and there is no upper limit. Secondly, property is subject to a lot of legal paper work and one has to go through a very cumbersome procedure to acquire properties. However, it is very easy to buy and sell shares by becoming the member of SEBI registered broker. Thus buying and selling shares is as easy as snapping your fingers. There is often a threat of encroachment of the property which involves costly litigation. Equity shares have a big advantage here since the stocks purchased get directly deposited in the investor's D-mat account where it is in the safe custody and one can sell them whenever he desires to sell. Further If returns on investments is considered as a parameter than historically it’s proved that returns earned in equity investments is superior to all the asset classes including the real estate over a long term. The Real Estate has given an annualized return of 8 to 9 percent whereas equity has given a yield of 12 to 15 percent. Finally One can make partial withdrawals from equities and get the sale proceeds in maximum three days (T+2),whereas it is not possible to get part withdrawals in the real estate, one has to sell the entire property and the payment proceeds sometimes takes months. Hence Equity market has immense liquidity to take immediate Exit whenever he or she decides and that is far too easier and faster than Real Estate.

Investments in Conventional Mutual Funds

Investments in Conventional Mutual Funds is not permissible from the view point that these mutual funds are not mandate to follow Shariah norms thus they even invest in stocks of prohibited businesses like Liquor, Banks, Hotels, Entertainment, Cinema, Casino etc. that is strictly prohibited in Islam, hence profit earned from these mutual funds is impure and tainted. They invest in Debt & derivatives instrument too which is not allowed under the Shariah laws. And moreover, since about 45 percent of the Market Capitalization is Shariah Non- Compliant, presumably almost 40 to 45 percent returns earned is not Halal, hence this option too is not shariah compatible for Investments. However, Muslims can invest in Authentic Shariah- Compliant Mutual fund / Shariah compliant PMS, approved and monitored by reputed Shariah Scholars and fund manage by people who have faith in shariah.

Big Advantage

One more point that goes in the favor of equity Investment is the Capital gains tax. The long-term capital gains tax is just 5 % that too if the gains are above 1 Lac i.e. if the investment is held for more than one year. And the short-term investments for less than a year, investors is obliged pay only 15 % percent tax on its gains on booked profit after subtracting losses. Muslims must take advantage of this benefit and invest in equities that would help them create wealth in the long term in the Shariah way. The only concerning part in the equities investment is the market risk and volatility. The performance of the company, industry and economy is never static and varies from time to time and since the market is a result of mass psychology it goes up or down on fear and hope based on the underlying fundamentals. Andin order to overcome this and to optimize Halal return on investments, one needs to take guidance from Shariah based Equity Research advisors and Fund managers who can guide and advise the prospective investors based on their Risk Profile and Risk Appetite. If this part is taken care of diligently, then equity investment certainly is the best Investment option for Muslims.

Role of Shariah Scholar

Islam makes ‘Lawful Earning’ (Halal) mandatory, and in Islam, the spiritual and secular aspects are one and the same. This implies that Islam emphasizes the need to make a living by means that are permissible under it. After many years of debate and discussions and looking into the need for Muslims to Invest in equity markets as an alternate to Bank and Insurance, Islamic scholars have permitted Muslims to invest in equity markets with certain strict stipulated conditions. With the advent of computer technology and with so much of information available, now it is possible to screen the companies on Shariah norms and do the purging as well.


Imtiaz Merchant
Shariah scholars have imposed investment restriction and conditions and only upon fulfilling these conditions Muslims can invest in equity markets the Halal way.

The conditions laid down are as follows:

  • Restriction based on the type of Securities: Investment should only be done in Shariah compliant stocks as defined. A security trading in derivatives and day trading in stocks is strictly not permitted. Short selling is prohibited. Securities should only be sold after having its complete possession.
  • Restriction on Business Activity: No investment shall be made in stocks of the companies whose business activity is Prohibited (Haram)
  • Conventional interest-based banks and other financial institutions like banks, NBFC, Insurance companies, stock brokers, Securities traders etc.
  • Alcoholic beverages like wine and other liquor related products and services.
  • Pork and non-Halal food products
  • Entertainment includes film production companies, cinema, Cable TV, music etc.
  • Restriction based on financial ratios: Apart from the above restriction, Islamic scholars from different part of the world have set certain financial criteria based on the need and essentiality. In India Islamic Investment &Finance Board (IIFB) and independent Shariah Board comprising of eminent scholars have approved the following financial criteria:
  • Interest bearing debt of the companies should not exceed 33 percent of its twelve months’ average market capitalization.
  • Cash plus interest bearing securities of the companies should not exceed 33 percent of its twelve months’ average market capitalization.
  • Trade receivable and other debtors of the companies to its twelve months’ average market capitalization should not exceed 33 percent.
  • Interest Income plus prohibited activity (impure) income of the companies to the company’s total income should not exceed 5 percent. (subject to cleansing)
  • Shariah Screening Process: Shariah screenings conducted for all the listed equities as prescribed and mandated by Shariah scholars. This process is done every quarter. Those stocks that successfully pass the Shariah screening norms are thus called Shariah complaint universe. This process is done under the supervision and audit of Shariah committee of Aalims and muftis.
  • Purification of Impure Income (purging): The income thus derived from trading and investments in shares do have some portion of impure or prohibited income. This income can be in form of interest received by the companies or some prohibited activity carried on by the company that earns impure or tainted income which needs to be cleansed or purged. This is a compulsory process. The impure income consequently cleansed should be given as charity (Without expecting Sawaab).
Conclusion

In conclusion we can confidently and vividly say that Equity investment the Islamic way is the Best option or alternate available to Muslims to park their saving. The investment in the company is well regulated by SEBI and approved by Shariah scholar, it is liquid enough to withdraw as and when, transparent, safe in D-mat A/c, lower Taxes, least cumbersome as compare to other asset classes and above all superior returns in the long term, the equity investment in the listed companies are almost coefficient of the economic growth.

No lending or borrowing, just investing. And truly an ethical and socially responsible way of Wealth Creation.

Note: The above text is the property of Pragmatic Wealth Management Pvt. Ltd. The above content cannot be used or reproduced without the consent and permission from Pragmatic Wealth Management Pvt. Ltd. in written.

[Imtiaz Merchant is Managing Director of Pragmatic Wealth Management Pvt. Ltd. He is Editor of Islami Tijara Magazine and Owner of Brand Adaaf Advisory Services. He can be reached at merchant@pragmaticwealth.net]

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Posted by Indian Muslim Observer on January 13, 2021. Filed under , , , , , . You can follow any responses to this entry through the RSS 2.0. Feel free to leave a response

By Indian Muslim Observer on January 13, 2021. Filed under , , , , , . Follow any responses to the RSS 2.0. Leave a response

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