Many Muslim investors are curious about the origin of the Halal stock screening methodology. Where do the threshold numbers come from, and what is the logic behind them? In this article, we will briefly discuss why Halal stock screening is needed.
The Concept of the Stock Market
In the seventeenth century, the concept of a modern stock market was first introduced in Netherlands. On the other hand, we can trace that the Islamic concept of mudharabah, which is similar to the modern stock market concept, existed in the sixth century during the time of Prophet Muhammad (PBUH).
Though Muslims are the pioneer of profit and loss sharing investment in the business through a contractual agreement; the current conventional stock market prevents the devout among them from reaping economic benefits due to Shariah non-compliance issues. As a result, despite religious encouragement for Muslims to seek economic opportunities, they cannot fully participate in conventional stock market trading.
Because Islam encompasses every aspect of believers’ public and private life; it is the responsibility of qualified jurists to extrapolate the Islamic principles and set the guidelines for operation in the stock market. In Islam, investing in the stock market is permissible. However, the Shariah principles set the rules and regulations that distinguish the Shariah-compliant stocks from non-compliant ones.
The Rulings Behind Halal Stock Screening in the Stock Market
The ruling of riba prohibition is not negotiable. Some scholars and researchers argued that there should be zero tolerance towards the involvement in riba activities. However, they understood that this is inevitable in this current economic and financial system. Most of the companies are involved in interest-based transactions. Moreover, the companies listed on the stock exchange tend to have mixed (permissible and impermissible) business lines. Prohibiting Muslims from participating in such companies would create hardship for Muslim investors.
Furthermore, a legal maxim requires that “Harm must be eliminated” (Al-darar yuzal). Another maxim states: “Hardship begets facility (Al-mashaqqa tajlib at-taysīr),” which indicates alternatives and a way out for the hardship resulting from certain rulings. In addition, another legal maxim also states: “Necessities make forbidden things permissible (Ad-darurat tubih al-mahzurat).”
From those above mentioned Islamic legal maxims, it is reasonable to make some stipulations in order to remove the hardship and prevent harm to Muslim investors. At the same time, the stipulation should be based on genuine and unavoidable circumstances. In other words, the stipulations should be proportionate to the companies’ and investors’ genuine needs and actual necessities. Therefore, the permission from the original rulings should not be so stringent that it does not assist the market participants and fail to remove the hardship. On the other hand, it should not be so relaxed that it can be abused or allow impermissible things without valid justification. As another maxim clearly said, “Dispensations given owing to necessities must be limited to the extent of the necessities.”
Keeping this in mind..
It is necessary to acknowledge that the Shari’ah ruling on participation in the capital markets deserved some relaxation. Still, the relaxation should be limited to its actual need.
Read more about the rationale behind the benchmark number of the Halal stock screening methodology here.
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