9 Trading Rules You must Follow According to Shariah

9 Trading Rules You Must Follow According to Shariah

According to Islamic finance, there are trading rules you need to follow in order to avoid injustice during the trade or financial transaction. Islamic finance does not favors only one party; It considers the interests of the buyer above the seller, the receiver of capital over the producer of capital, and even the depositor over the bank. Its goal is to treat all parties involved in a transaction fairly. Here are some of the essential trading rules according to Shariah :

1. You cannot earn profit without risk

There is no riskless return. If you are willing to invest your money, you must be willing to accept a loss in case it doesn’t work out. The higher the risk, the higher the return. For example, in business school, it is taught that government bonds are risk-free. According to Shariah, it is unpermissible because the debt should be interest-free and you must pay it back.

2. There is no guaranteed return

According to Shariah rules, you cannot guarantee the returns. It is because a business or venture can fail. In case the venture will not succeed, then investors will not get any return. Creating a pre-determined rate of return is acceptable. For instance, rental or lease payments that are fixed each month, but to guarantee them means that if your renter’s defaults, you are still on the hook to make the payments to your lender or investor.

3. You cannot lose more money than you invested in.

It is impossible that you lose more than your investment. When you invest in the stock market, the maximum amount you can lose is equal to the amount of your investment. Investments in corporations or limited liability companies (LLCs) are designed to shield investors from losing more than their investment.

4. Investors are treated equally

Islamic finance never favors an investor over another. On the contrary, in conventional finance, preferred shares are often offered investors the first claim on a company’s profits above common stockholders. In Islamic finance, this is not permissible. All investors in shares are equal to other shareholders.

5. You cannot sell what you do not own

The ownership issue is a common case in traditional finance. Trading security without the actual transfer of ownership is becoming a common practice in conventional finance. However, it contradicts Islamic principles that prohibit selling something that you don’t own.

It was narrated that Hakeem ibn Hizaam (may Allah be pleased with him) said: I came to the Messenger of Allah (blessings and peace of Allah be upon him) and said: A man may come to me wanting to buy something that I do not possess; should I buy it for him from the marketplace then sell it to him? He said: “Do not sell that which you do not possess.”

6. To earn the profit, invest your money something profitable and acceptable

Hoarding money or allowing it to stay idle is frowned upon. Money cannot earn a return if it is left uninvested. Money, in fact, cannot produce a profit until it is invested. This also relates to principles 1 and 2, implying that you must be willing to accept some risk in exchange for an uncertain return. Besides, you should consider the permissibility of the business activities of your investments.

7. There must be transparency

Transparency is very essential in any financial dealing. If you are selling a car, you need to tell all defects and issues, allowing a potential buyer to make a decision based on all the information you give. It is the same for investors looking to acquire or invest in a company.

8. Transaction should be gambling-free

It is obvious that gambling and lotteries are haram. Gambling can happen in any form and situation. For example, instead of borrowing his car, you make him an offer to buy his car tomorrow, but only when the soccer team wins the game. This is not permissible according to Shariah, since the sale will take place only if a chance event occurs.

9. Money is not a commodity

Money cannot be discounted or sold in advance or at a markup. It cannot earn a return on its own by being lent out. The ruling of money falls under the ruling of ribawi items. Money can be exchanged only with an equal amount and on the spot basis. Therefore, money is not something that can be used to create money through interest.

Understanding the Shariah trading rules will help you make the financial decision in a lawful manner and in a halal way. The Shariah principles aim to promote justice and stability in the realm of the economy.

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