The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.
Question:: I had a question about investing in the stock market I have heard that it was questionablebecause of a condition that is necessary in an islamic contract - that of ijaab and qabool (offerand acceptance). I have heard that when people are in a contract with one another (in any form,including as shares of a company), that a necessary element in the islamic contract is that theparties involved have the right to make decisions regarding the contract. However, some say thisdoes not happen in the shareholder case because it would be impractical in some cases to take thedecision of ALL shareholders - thus nullifying the contract islamically and making investing in thestock market questionable. Could you please help me?
I am confused - could you also list the necessary elements in a contract according to the differentmadhabs in Islam.
Answer: Thank you for your question about the fundamentals of a contract in Islamic law. In fact,part of the answer to your question comes from first hand experience. Allow me to explain (but I'llbegin at the beginning, the story will come later!) The classical jurists explain that every legalcontract is composed of a pillar and four fundamental elements. Thereafter, a contract may haveother elements, like conditions, rights, responsibilities, effects, etc. While these may appearto be very basic and therefore very simple matters, they are at the core of all transacting and aretherefore very significant for their practical and legal ramifications. The pillar (or rukn in Arabic)is what you asked about in your question, ijab and qabul. As pillars, the obvious inference to be drawnis that if you don't have ijab and qabul, you don't have a contract. Without a pillar, you have no legto stand on, so to speak! Without an offer and its acceptance, you don't have a sale. (See LessonThree: Principles of the Islamic Law of Contract where ijab and qabul are referred to as intention andconsent.) When you buy stock, you actually enter into a contract with an agent, or a broker for thepurchase because it is a part of the regulatory system that only licensed brokers are allowed toactually buy and sell stocks. So, you, the buyer, contract with a broker. This may be done on thephone or in person, by means of a verbal agreement, or in writing, by letter, fax, or the internet.Whatever the means, if you have understood that the broker has agreed to what has been proposed, andif the broker understands that you have agreed, then ijab and qabul will have come about, and you willhave a deal, a contract. Generally, what happens next is that your stock broker will send a floorbroker to go to a specialist firm (brokers to the brokers who maintain a booth on the floor of thestock exchange) with you order. With your order in hand, the floor broker will go the appropriateplace on the floor of the exchange and see what is bid and what is asked for the stock you haverequested. This bidding and asking is not only the essence of trading on the stock market, itcorresponds exactly to the fundamental pillar of an Islamic contract, or ijab and qabul. Sometimesthe floor broker will buy the stock for you from the specialist firm in the booth, and sometimes thefloor broker will encounter another floor broker at the booth and conclude a trade right then and there,again by means of a contract based on bidding and asking. Now, to the first hand story. One of yourother instructors, Dr. Mohamed Elgari, and I had the pleasure of visiting the New Stock Exchangeearlier this year in the company of some other of our colleagues. There we were shown around thefloor by a representative of a brokerage company and, as we stood in front of one the booths, twobrokers in their special green jackets arrived at just about the same time, each from a differentdirection. Then, right in front of us, as other brokers were standing and buying from the specialistbroker inside the booth, the two brokers looked at each other and, in a matter of seconds,communicated to each other that one was there to sell and the other to buy, and that the stock theywere interested in was the same, and that the asking price was so much, that the other broker waswilling to bid so much... etc. all in the space of seconds. And then the deal was done! The stockhad been traded. Dr. Elgari and I looked at each other, and our colleague, also a Shari`ah scholar,said what we had been thinking... "There's your ijab and qabul!"