The following set of business activities are considered prohibitedin Islam, and thus investing in these kind of businesses is notsomething a Muslim should undertake.
Food and Beverage Related
- Alcoholic Beverages
Islam forbids a Muslim to manufacture, consume or sell all intoxicating material, which include all Alcoholic beverages (such as Wine, Beer, ...etc.)
- Pork and Pork Products
- Tobacco products
Even though many Muslims do consume Tobacco, its harmful effects on one's own health (as well as other passive smokers) is undisputed. Therefore, many scholars are of the opinion that Tobacco products are prohibited in Islam.
Gambling in all its forms is prohibited.
This includes Casinos, Internet Gambling Outfits, betting, such as Horse and Dog racing, ...etc.
Lottery schemes can also be considered as a form of gambling, regardless if it is run by governments or not.
Pornography and Adult oriented Material
Whether in the form of Video tapes, Magazines, Internet images, or stripping clubs, all Adult oriented material is prohibited, whether fo minors or adults alike.
Interest and Businesses based mainly on Interest
Interest is considered Usury (Riba) and therefore business that have a significant portion of its income from interest are considered prohibited. This includes Banks, Credit Card, Financing, Mortagage, ...etc.
Due to the prevalence of interest in today's world economy (even in Muslim countries), it is fairly difficult to find a business with 0% interest in its income.
Therefore, some scholars have set a threshold for the percentage that a business draws income from interest. If a business has 25% or less of its total income from interest (some said 33.3%), then it is allowed to invest in that business, and get rid of the interest based portion of the income, by giving it away to the poor and needy or for public charity.
Many illegal or unlawful activities are prohibited in Islam, either explicitly of implicitly. These include:
Extra marital sexual relationships are forbidden in Islam. Therefore, it goes without saying that profiting from such activities are also prohibited.
Because of their intoxicating effect, drugs are considered the same as alcohol (see above). Moreover, because of the deeply addictive nature of drugs, and their effect on ones health, finances, family and society, they are prohibited.
Some activities may not be explicitly prohibited, and Muslims may disagree on whether they are lawful or not.
- Commercial Insurance
Many scholars have held that Insurance, in its present for is prohibited, since you pay money for something that may or may not happen. The insurer takes this money, and in most cases gets to keep it all, and (if too many claims occur) may end up with a loss.
This imbalance is unfair, and have led to a tendency to prohibit present-day insurance. For various points of view, check this discussion on International Journal of Islamic Financial Services
An alternative is Cooperative Insurance where all participants co-own the pooled premiums. The pool is invested, and any claims from participants are settled. Any profit from investment (less all claims) is distributed at the end of the period (e.g. fiscal year). This is a fairer method.
Until such a system is in place, there is no viable alternative to commercial insurance, and many scholars have allowed utilizing it as a temporary measure.
- Day Trading
Most day traders and day trading web sites clearly acknowledge that their business has little to do with investing, and that all they do is watch the market and buy and sell on short term price fluctuation (normally within one day).
For this reason, many scholars have stated that this is closer to gambling than anything else, and therefore is to be avoided.
However, check the references mentioned in our Stocks section, under Speculation for more detail.
In addition to the religious reasons, there are also practical ones, because of the very high risk day trading envolves.
You can also read the following for more on Day Trading:
- Day Trading: Your Dollars at Risk
- Are you Investing or Gambling? Take the quiz to know which one you are doing!
- Margin Trading
Margin trading is buying stocks using money loaned from the broker. Interest is paid for this loan, and therefore it is prohibited. In addition to the Islamic prohibition, this is a very risky (and complicated) practice, since you can lose more than what you have borrowed, when you are asked to cover up the loan (if the stock price goes down).
- Derivatives - Options and Futures
In Options, you are actually purchasing the right to buy a stock (or a commodity such as Gold, Silver, Currency,...etc.) at a future date for a fixed price (regardless of the current price in the market). If you exercise the option, you buy at the price set in the past, otherwise, you do nothing and the option expire (and you lose what you paid for the option). Most scholars are of the opinion that Futures trading is prohibited in Islam.
Justice Taqi Usmani states in this article on International Journal of Islamic Financial Services: "According to the principles of the Shariah, an option is a promise to sell or purchase a thing on a specific price within a specified period. Such a promise in itself is permissible and is normally binding on the promisor. However this promise cannot be the subject matter of a sale or purchase. Therefore, the promisor cannot charge the promisee a fee for making such a promise.
Since the options transactions as in vogue in the options market are based on charging fees on these promises, they are not valid according to the Shariah. This ruling applies to all kinds to options, no matter whether they are call options or put options. Similarly, it makes no difference if the subject matter of the option sale is a commodity, gold, silver or a currency; and as the contract is invalid ab-initio, the same cannot be transferred."
In Futures you sign a contract for a fixed price, to be executed at a future date at teh price set (months) earlier, regardless of the current market price of the stock or commodity.
Most scholars are of the opinion that Futures trading is prohibited in Islam.
Justice Taqi Usmani states in this article on International Journal of Islamic Financial Services:
"The Futures transaction as in vogue in stock and commodities markets today are not permissible for two reasons:
- It is a well recognised principle of the Shariah that sale or purchase cannot be affected for a future date. Therefore, all Forward and Futures transactions are invalid in Shariah.
- In most of the Futures transactions, delivery of the commodities or their possession is not intended. In most cases, the transactions end up with the settlements of difference of prices only, which is not allowed in the Shariah."
Note however, that Employee Stock Options do not fall under this prohibition, as explained by Yusuf Talal DeLorenzo in our Scholar Answers, due to other considerations. The way it commonly works is where the company gives the employee certain number of stocks to be purchased at a later date for a fixed price. This is an incentive to employees to work hard and make the company profitable so the stock price goes up. If the option expires (or the stock price is low) the employee pays nothing (he does not exercise the option).
In addition to religous aspect, Options constitute a very high risk investment avenue, and can cause the novice of to lose a lot of money.
Shorting is borrowing stocks and selling them when the stock is going down. You owe the lender (the brokerage firm from one of its customer's account, most probably) the specified number of shares, regardless of the current market price.
Later, when the stock is going up, it is sold at the (higher) market price, and the borrowed stock is given back to the lender. You (the shorter) get to keep the difference.
The huge risk involved is for a stock to continue to go up, and you are required to return what you borrowed! You have to buy the shares from the market and return them. The amount of risk here (at least in theory) has no upper limit, and you can lose more than the capital you have invested.
What do you think about Sharia ruling on this? You are selling something that you do not own, on your behalf and not on behalf of the owner.
There are also other requirements that a company must meet before most scholars would deem it acceptable to invest in. These are as follows:
- Companies must have a debt to equity ratio equal to or less than 33%.
- Companies must have Account Receivables to Total Asset ratio equal to or less than 47%.
- Companies must not receive more than 9% of total income from non-operating Interest activities.
Instead of repeating all the details and reasoning on why the above is so, we will refer you to detailed explanations:
- By Justice Mufti Taqi Usmani in this article on Conditions for Dealing in Equity Shares (scroll down halfway) on the International Journal of Islamic Financial Services.
- By Mr. Muhammad Imran Usmani at this page on the IslamiQDaily web site (web site no longer operational).
Also check the links below, they will help you screen companiesquickly and exclude those that engage in prohibited activities:
- Islamic analysis of the Dow Jones (DJIA) companies.
- Islamic analysis of the USA Industry classification. In the USA, each publically trading company is classified within an industry.
- Dow Jones Islamic Market (DJIM).