Turaths & Todays: Muamalat Essentials

(Class #10, Summary of the class)

Shirkah (الشركة)

Question:

Some people are making marketing videos where the host asks questions like: “If you answer correctly, you will receive 5 dollars. Do you want to double it for the next question?”

What type of contract is this? Is it considered gambling? Are there any Shariah-related issues associated with this activity?  Is it a Zero-sum game?

Answer:

In this case, the arrangement initially appears to be a ʿaqd tabarruʿ (voluntary contract) — where someone promises to give a certain amount of money as a gift (hibah) if the other person answers the question correctly.

• This is not a service fee or compensation for work, but rather a voluntary act of giving made conditional.
• The first act may be classified as hibah (a gift), and if the money is immediately given, there is no issue.

However, the problem begins when:

• The participant is asked whether they want to proceed to the next question, doubling the amount.
• The money has not yet been transferred, and the continued reward becomes conditional upon future performance.
• At this point, the arrangement shifts into maysir (gambling) because:
  • There is a risk of losing the initial reward.
  • The outcome is uncertain and based on chance or guessing.
  • There is no genuine exchange of goods, services, or ownership.

Shirkah (Partnership) in Islamic Jurisprudence

The word “Al-Ikhtilaath” (الاخطلاط) in Arabic means “mixing” or “blending” things together.

In fiqh terminology, الشركة (shirkah) refers to a contractual agreement that results in a shared, undivided right over something between two or more parties. This could be in the form of joint capital, shared skills, or mutual effort.

In essence, Shirkah is a contract where two or more parties agree to contribute capital, labour, or expertise, and share the resulting profits or losses according to a mutually agreed-upon ratio.

Pillars of Shirkah (Arkan As-Shirkah)

There are three key pillars of a valid shirkah contract:

1. Parties (‘Aqidan): There must be two or more contracting parties involved.
2. Capital (Malan): Each party must contribute capital, which can be in the form of money or assets.
3. Offer and Acceptance (Sighah): There must be an explicit mutual agreement and understanding between the parties.

Types of Shirkah

There are two primary types of shirkah:

1. Shirkah Al-Milk (شِرْكَةُ الْمِلْك) – Co-ownership without contract

• This occurs when two or more individuals jointly own an asset (e.g., inherit or purchase something together).
• Each partner has a defined, undivided share in the property.
• It is a passive form of partnership and does not necessarily involve commercial activity.

2. Shirkah Al-‘Uqud (شِرْكَةُ الْعُقُود) – Contractual partnership

• This is a formal agreement to engage in a joint business venture.
• Each party contributes either capital, skills, labour, or assets, and profits/losses are distributed based on pre-agreed terms.
• This form of shirkah includes various subtypes such as:
  • Shirkah al-Mufwadhah (equal partnership)
  • Shirkah al-‘Inan (limited partnership)
  • Shirkah al-Abdan (partnership through effort/labour)
  • Shirkah al-Wujuuh (partnership based on credit reputation)

Conditions for Both Parties

First, both parties may appoint an agent if they are both involved in performing the transaction. Second, if only one party performs the transaction, that party must be someone who fulfils all the requirements to carry out the transaction.

If one of the parties is unable to perform the transaction, they may appoint a qualified person (tawkil) to conduct the business on their behalf.

Conditions required for Valuable Assets in Shirkah contract (Partnership)

1. Homogeneity of Assets: The assets contributed by both contractual parties must be of the same type and specified in terms of their nature and description.
2. Mixing of Assets: The valuable assets or capital from both parties must be mixed or pooled together, forming a single, unified capital for the partnership.
3. Permission to Manage: Explicit consent must be obtained from all partners to appoint a party or manager to handle business operations on their behalf.
4. Profit and Loss Sharing: Profits and losses must be shared between partners in proportion to their respective capital contributions.

Accepted Views Between Madzaahib (Schools of Thought)

According to the Syafi’i and Hanbali schools, if two parties contribute equal capital (for example, 100), they must share the profits equally (50:50). However, any losses must be borne according to the proportion of capital contributed by each party.

According to the Maliki and Hanafi schools, each party bears losses equal to the amount they contributed. However, any profits may be distributed according to the agreement made by the partners.

For example: If two people enter into a partnership and each contributes 50% of the capital, they will both bear losses equally (50:50). However, they may agree to share the profits in a 70:30 ratio if one of them contributes more effort, time, or expertise to the business operations.

The condition of the partnership formula صيغة الشريكة (Sighat al-Sharikah)

There must be permission to manage the partnership granted to the person responsible for carrying out the business operations.

The Illustration of Shirkah

• Zaid contributes 100 dinars.
• Amru also contributes 100 dinars, of the same type (genus) and with the exact specifications (description).
• They mix their capital into a single fund.
• Both of them declare: “We are partners in this, and we give each other permission to manage it.”

Modern Financial Instruments

Modern financial tools and contracts can be developed in line with the principles of shirkah.

The Prophet Muhammad ﷺ brought shariah to humankind to protect, regulate, and safeguard the community from practices that are unjust or harmful.

One interesting aspect of mu’amalah (transactions and social dealings) is its flexible nature. Continuous innovation is allowed as long as it aligns with Islamic principles.

When it comes to acts of worship (ibadah), the basic principle (al-ashlu) is prohibition (at-tahrīm).

الأَصْلُ فِي العِبَادَةِ التَّحْرِيمُ

“The original ruling for acts of worship is prohibition.”

This means that any form of worship is not allowed unless there is clear evidence from the Qur’an or Sunnah that prescribes it. Therefore, worship must strictly follow what has been commanded or demonstrated by the Prophet Muhammad (peace be upon him).

On the other hand, in muamalah (worldly transactions and social dealings), people are free to develop new ideas and practices.

الأَصْلُ فِي الأَشْيَاءِ الإِبَاحَةُ إِلَّا إِذَا وَرَدَ النَّصُّ عَلَى تَحْرِيمِهَا
“The original ruling for worldly matters (muamalah) is permissibility, except when there is explicit evidence that prohibits them.”

This means that all types of transactions, business activities, technology, and social innovations are lawful and permissible, as long as there is no clear evidence that forbids them. Examples of prohibitions include transactions involving usury (riba), excessive uncertainty (gharar), gambling, or fraud. Modern transactions, such as online trading, financial technology, or new business models, are permitted as long as they are free from prohibited elements.

Allah SWT has clearly defined what is halal (permissible) and what is haram (prohibited).

قُلْ تَعَالَوْا أَتْلُ مَا حَرَّمَ رَبُّكُمْ عَلَيْكُمْ

“Allah, Glorified and Exalted, has specified what He has forbidden”[1]

Foundations of Muamalah

• Ta‘abbudiyyah (Acts of Worship)
• Adalah (Justice)
• Taraddi (Mutual Consent)
• Falah (Success and Prosperity)

Prohibitions in Muamalah

• Non-permissible activities and items
• Riba-based transactions
• Activities involving gharar (excessive uncertainty)
• Gambling

Types of Investments:

• Individual Stocks
• Bonds or Sukuk
• ETFs
• Mutual Funds
• Hedge Funds
• Derivatives

What is a Hedge Fund?

A hedge fund is an investment fund that pools capital from accredited investors or institutional investors and invests in a diverse range of assets using sophisticated investment strategies. These may include leveraging, short-selling, derivatives, and arbitrage to achieve high returns regardless of market conditions. Unlike mutual funds, hedge funds are less regulated and often require higher minimum investments.

Question: Why Do Many People Invest in Hedge Funds?

Many investors choose hedge funds even though general long-term market investments often offer higher returns. Hedge funds are designed for shorter-term strategies. They aim to minimise losses and generate slightly higher returns, especially during periods when the overall market is underperforming.

Question: Why Do Wealthy and Sophisticated Investors Use Hedge Funds?

Wealthy individuals often have diversified portfolios and clear asset classifications. They understand long-term market trends but also seek to protect their wealth during downturns. They may have exposure to property and other businesses, so hedge funds help reduce the risk of significant losses when the market declines.

What are derivatives?

Derivatives are financial instruments that can involve interest-bearing loans, which raise concerns about riba(usury) in Islamic finance.

What Are Options?

Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset (like a stock) at a specified price (called the strike price) before or on a specific date (called the expiration date).

There are two main types of options:

• Call Options: Give the holder the right to buy the asset at the strike price.
• Put Options: Give the holder the right to sell the asset at the strike price.

Shariah Issues to Consider When Investing

• Halal and Tayyib (pure and wholesome)
• Free from Riba (usury, including return on interest)
• Free from Haram elements (e.g., pork-related, tobacco, weapon industry, etc.)
• Free from gambling activities (Maysir)
• Free from excessive ambiguity (Gharar)

Notes: If you fully understand what you are investing in and it does not contain any of the elements above, then invest! However, if you do not understand, it is better to learn first and hold off until you do.

Stocks / Shares

An ordinary share represents undivided ownership by a shareholder in the company’s business. It gives the holder the right to share in the company’s profits and earn dividends.

Publicly listed companies typically disclose information about how they plan to raise capital and how the funds will be utilised.

It is permissible to trade in stocks according to the views of contemporary Shariah scholars and standards, such as those established by AAOIFI. However, for these stocks to be Shariah-compliant, they must pass a Shariah screening methodology.

Initial Public Offering (IPO)

An IPO is the process of offering shares of a private corporation to the public for the first time through a new stock issuance. An IPO enables a company to raise capital from the public by issuing equity. After the shares are issued, shareholders can trade them on the listed stock exchange.

Examples of Individual Stocks

Nasdaq/NYSE (US):

• Apple
• Meta (formerly Facebook)
• Alphabet (Google)
• Tesla

HKSE (Hong Kong/China):

• Alibaba
• Tencent
• Baidu

SGX (Singapore):

• Singtel
• StarHub
• Creative

Shares Related Issues

It is not permissible to participate in:

• Interest-bearing loans to fund share purchases
• Short-selling
• Options trading

Question:
Is it permissible to buy or invest in something halal, but it turns out that what we purchased or invested in is used for something haram? For example, owning shares in Starbucks or McDonald’s, which reportedly channel funds to Israel.

Consider this: buying the shares is halal, but it turns out that the transactions or the use of the money involve haram activities.

Similarly, what about selling grapes, which are halal, but selling them to a wine seller?

Scholarly Opinions:

Imam Malik’s view (Saddu Dzari’ah – blocking the means):

• This is not allowed because the buyer will use the halal item for haram purposes. Therefore, one must prevent such transactions to avoid facilitating wrongdoing.

Imam Shafi’i’s view:

• It is permissible, similar to buying products from non-Muslims. When we buy, we do not necessarily know or control how our money will be used afterwards. Thus, the transaction remains valid.

This situation may be considered makruh litanziih (disliked) or possibly haram, depending on the circumstances. Therefore, it is better to avoid such transactions and be cautious to protect oneself from involvement in haram activities.

What is Short Selling?

Short selling is a trading strategy where an investor sells shares they do not own, hoping that the price will drop so they can repurchase the shares later at a lower price, return them to the lender, and pocket the difference as profit.

How it works — Step by Step:

1. Borrow shares from a broker or another investor.
2. Sell the borrowed shares at the current market price.
3. Wait for the price to drop.
4. Buy back the shares at the lower price.
5. Return the shares to the lender.
6. Profit = selling price − buying price (minus fees).

Illustration:

Imagine the price of Stock XYZ is $100 per share.

• You borrow 10 shares and sell them immediately for $100 each, so you get $1,000.
• The price drops to $70 per share.
• You buy back 10 shares at $70 each, spending $700.
• You return the 10 shares to the lender.
• Your profit = $1,000 (initial sale) − $700 (buyback) = $300 (minus any fees).

If the price goes up instead of down, you have to buy back the shares at a higher price, which causes a loss. Most scholars consider short selling impermissible because it violates Islamic principles of trading, primarily due to the sale of something one does not own and the presence of gharar (uncertainty).

Shariah Screening Method

For stocks to be Shariah-compliant, they must pass a Shariah-compliant screening methodology.

• There are various Shariah screening methodologies and standards, such as:
  • AAOIFI standards
  • Securities Commission’s Shariah Advisory Council (SAC) screening methodology
  • Other index standards (e.g., Dow Jones, S&P, Financial Times)
• These screening methodologies are Ijtihadi in nature and represent the views of various contemporary Shariah scholars.
• Available screening tools for retail investors include:
  • Zoya
  • Islamicly
  • IdealRatings
  • Shariahscreener.com
  • Finspia

[1]Al-Qur’an, Surah Al-An’am (6:151).