Are Preferred Stocks Halal? Know What Experts Say

Are Prefered Stocks Halal_ Know What Experts Say

Are the preferred stocks halal? We have talked about what preferred stocks are before. In the following article, we will find an answer to the question “Are the preferred stocks halal?”

Generally, there are two types of stocks: common and preferred stocks.

Preferred Stocks

Preferred stockholders have a larger claim than common stockholders on distributions (such as dividends). In terms of corporate governance, preferred stockholders usually have no or limited voting rights. However, they have a better claim on assets than common stockholders, but less than bondholders, in the case of a liquidation.

Pros and Cons of Preferred Stocks:
  • Preferred stocks are less risky than regular common stocks and pay bigger dividends. However, they don’t have the same upside potential as common stocks. They are also denied the right to vote.
  • Preferred stocks are riskier than bonds, with lower credit ratings, but they normally pay bigger dividends. They are exposed to interest rates and credit risk, much like bonds.

Are the Preferred Stocks Halal?

Unlike ordinary stocks, the majority of prominent Islamic finance groups and experts believe that preference shares are not Shariah-compliant.

Organizations such as the International Islamic Fiqh Academy (Majma ‘Fiqh Islami), AAOIFI, and the Securities Commission of Malaysia issued various fatwas on the status of preference shares in Shari’ah.

Islamic Fiqh Academy

The Islamic Fiqh Academy prohibits investing in preference shares:

“It is not permitted for companies to issue enjoyed shares or preference shares or debentures. In a situation where the company is suffering, each shareholder must carry its share of losses according to their particular capital contribution within the company.” (Resolution and Recommendation of the Islamic Fiqh Conference Council 1985-2000 at the 7th Conference, 2000, Resolution No. 6/94, pp. 140).

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

As stated in Shari’ah Standard No. (12) Sharika (Musharakah) and Modern Corporations, articles 4/1/2/14, AAOIFI has determined that preferential shares are impermissible:

“It is not permissible to issue priority shares, which are stocks that have special financial features that give them priority at the date of company liquidation or on the date of distribution of profits. However, it is permissible to give certain shares in respect of rights related to ordinary shares, matters relating to procedures and administration such as the right to vote”.

Securities Commission of Malaysia

The Securities Commission of Malaysia ruled on the non-cumulative preference share based on the tanazul concept at its 20th meeting on July 14, 1999.

“The Shariah Advisory Council ruled that non-cumulative preference shares are required based on the principle of tanazul whereby the common shareholder’s profitability is freely granted to the preference shareholders. tanazul is agreed at the Company’s Annual General Meeting, which decided to issue priority shares to acquire new capital. When this Meeting agrees to issue a preference share, it means that common shareholders have agreed to prioritize preference shareholders in the distribution of profits according to tanazul.”

Non-cumulative preference shares are ones in which the term for shareholders or investors to retain the shares is permanently unconstrained, according to the Securities Commission Malaysia’s Shariah Resolutions. They are comparable to ordinary shares, except that they are entitled to non-cumulative dividends.

Preference shares and ordinary shares are similar in that they have no maturity date and no claim to non-accumulated dividends. As a result, non-cumulative preferred shares are exclusively permitted by the Securities Commission of Malaysia’s Shariah Resolution; but preference shares are prohibited by most of the worldwide fatwa organizations such as the Islamic Fiqh Academy (Majma’Fiqh Islami), AAOIFI, and others.

Summary

Eventually, it is clear based on the rulings and resolutions that most Islamic jurists have made preference shares impermissible. However, the Securities Commission of Malaysia issued a Shariah Resolution making non-cumulative preferred shares permissible on condition that they must be based upon the concept of wa’d bi al-tanazul.

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