Islamic rulling of SIP

It should be clarified that the basic procedure of the prevailing Islamic mutual funds is as follows:

The investor, acting as a principal (Muwakkil), provides his money to the fund managers. The fund managers, according to the investor’s amount and requirements, guide him toward one of several different investment sectors.

The fund managers, acting as agents (Wakeel), invest his money in the following five areas:

1. Stock Exchange

2. Profit-bearing accounts in Islamic banks

3. Government Sukuk

4. Sukuk of private companies

5. Gold and silver markets

In return for this service, these institutions charge a fee.

The Shariah ruling regarding investment in these institutions is that investing in profit-bearing accounts of Islamic banks and in Sukuk is not permissible, because methods and devices are employed therein that cannot correctly be regarded as Islamic or free from interest.

However, regarding the first category, in which the institution invests in the stock exchange and buys and sells shares, it is necessary to observe the conditions prescribed for dealing in shares.

The necessary conditions are as follows:

1- The company whose shares are being bought and sold must have an actual existence in the external world; it should not merely be registered on paper. In other words, all of the company’s assets should not be in the form of cash. Rather, the company must have acquired some fixed assets, such as constructing a building for the company, purchasing land or machinery, or possessing finished or raw materials.

2- The company’s capital must be lawful and permissible, and the capital of institutions or individuals engaged in interest-based businesses must not be included among its shareholders. In other words, the shares should neither belong to a bank nor an insurance company, nor should the company have capital invested by institutions engaged in banking, insurance, gambling, alcohol, or any other unlawful business.

3- The company must not have taken an interest-based loan from a bank. The reason for this is that the company’s management is considered, according to Shariah, to be the shareholders’ agents in conducting trade and investment. Just as taking an interest-based loan oneself is impermissible, appointing someone as an agent to undertake such an activity is also impermissible.

4- The company’s business must be lawful and permissible. That is, the company must not deal in unlawful products, and its business must not only consist of lawful products, but must also be free from conditions that are contrary to Shariah principles. It must not be involved in gambling, betting, alcohol, interest-based business, etc. This is because just as engaging directly in an unlawful business is impermissible, assisting someone else in an unlawful business or appointing someone as an agent for such a business is also impermissible.

5- All the conditions of buying and selling must be observed in the purchase and sale of shares. For example, after purchasing shares, they must come completely into the ownership of the purchaser, and only then may they be sold onward. It is not permissible to sell the shares onward before the purchaser’s ownership and possession have been completed. Similarly, fictitious buying and selling must not take place. Nowadays, possession is considered to have taken place once the shares are registered in the investor’s name with the CDC.

6- The entire profit earned must be distributed among the shareholders; a portion of the profit must not be retained as a reserve. Therefore, if a company does not distribute its entire profit among all the shareholders, but retains a certain percentage for example, 20%—in anticipation of possible future losses and distributes the remaining 80% among the shareholders, then purchasing shares of such a company is not permissible.

7- Both delivery of the purchased shares and payment of their price must not be deferred. For example, if the purchaser verbally purchases shares at today’s price and agrees that both payment of the price and delivery of the shares will take place one week later, then this transaction is also not permissible.

8- The buying and selling of shares must not involve gambling. At times, the purchaser’s objective in buying shares is merely to settle the difference; that is, his purpose is not to become a shareholder in the company and earn annual profits, but rather to purchase shares at a low price and sell them as soon as their price increases. For this purpose, some people sell the shares onward without having taken Shariah-compliant possession of them, exposing themselves to the possibility of both an increase and a loss in the original amount, which is regarded as gambling in Shariah terminology.

Therefore, an investment cannot be considered permissible merely because it is called a SIP. The fund or company in which the money is being invested must fulfill all the aforementioned Shariah conditions. If these conditions are not fulfilled, investing in that SIP will not be permissible.

And Allah knows best.