Wa `alaykum as-Salamu wa rahmatullahi wa barakatuh.
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
1- Many jurists argue that it is prohibited to buy, own/hold or sell stocks of companies that makes any prohibited transaction whatsoever.
2- A group of jurists argue for an exception at this time and until a time when there will be reasonable number of halal stocks available to absorb the investments of Muslims,
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
In the first place, I should stress that Islam prohibits interest and certain other practices that contain any immoral or unfair ingredients such as gambling, unbalanced transactions, ambiguous contracts, etc.
This prohibition includes that a Muslim must abstain from such practices as an individual as well as a partner in a company, meaning that if a Muslim enters in a company with others, Muslims/non-Muslims, a Muslim must always be keen that other partners do not indulge in any non-permitted transaction because the management of a company acts on behalf of its owners.
Accordingly, many jurists argue that it is prohibited to buy, own/hold or sell stocks of companies that makes any prohibited transaction whatsoever. But a group of jurists, whose opinion is respected, argue that this ruling poses a great deal of inconvenience and hardship on many Muslims, especially in the West and other non-Muslim countries because there are only a few stocks that comply with it such as stocks of Islamic banks and a few other small companies, even these are not available for the greatest majority of Muslims.
And since hardship always calls for relaxation, they argue for exceptionality at this time and until a time when there will be reasonable number of halal stocks available to absorb the investments of Muslims, which may be even theoretically a long time. Yet, this exception has certain conditions that can be summarized in three groups:
a– The company’s main line of activity must not be haram in itself such as interest-based banks and insurance companies and Las Vegas type entertainment business, etc.
b– The degree of involvement in prohibited transaction must not be high, and here they argue that depending on interest-based loans, maintaining high percentage on receivables that in most of the times carry interest and having high percentage of interest in the company’s net income or giving donations to prohibited causes, etc. may be indications that should be considered, obviously the ideal is zero on all these, but one may say that 5%, 10%, 25%, 33% or the like may not to be a high to induce the prohibition on any or some of these points.
c– There always must be active process of cleaning your investment, i.e., to do away with the income that results from prohibited transactions by giving it to charity since according to the Shari’ah you really do not own it, and remember you are, Allah willing, rewarded for this action of cleaning but not as a Sadaqah nor Zakah.
Thus, investing according to these indices or stocks in them is on one hand an exception of the basic principle and on the other hand calls for cleaning your income, both from dividend and price increment that may have resulted from Shari`ah unlawful activity of the company.
To my knowledge, the listing in these indices is updated every three or six months, and if you have old information on a specific stock you may look in the web of that company and see if there was any substantial change in its fundamentals, balance sheet and income statement from the previous period when it was listed, if the change is not substantial, you may work on the assumption that it has not changed since during the period of comparison, this is not easy, is it?
Zakah on stocks: the opinion of the majority of the contemporary jurists is that if stocks are purchased for the purpose of capital gains, i.e., watching prices and get an opportunity to sell, even after split, at higher prices, especially if the idea is done in the short run, stocks are then objects of trade and they are subject to Zakah at the market value on the day a lunar year is complete from the day a nisab is owned.
This market value is added to your other Zakatable assets, like cash and bank accounts, and Zakah is due at 2.5% of the total if it is nisab or above. This means whatever dividend you got during the year is actually included (when it is either used for new stocks or other Zakatable assets) unless was used for consumption (whether used up like food or durable like a refrigerator and both are exempt from Zakah).
But if stocks are used for income (their dividends), the Zakah is due only on a percentage of the stocks’ value that equals the percentage of the net mobile assets (inventory + cash on hand and in banks + receivables and similar payables) to total equity of the company.
In all cases, if it is difficult to calculate the Zakatable amount at the lunar year, then you may take the figures from the Gregorian (solar) year and compensate for the difference by adjusting the rate of Zakah from 2.5% to 2.577% (= 2.5% + 2.4% multiplied by 354/365).
Besides this opinion, there is a view that only the income (dividends) of stocks held for their income is subject to Zakah at a rate of 10% in similarity with agricultural land and products. I believe that this view is weak and cannot be substantiated by the rules of Usual Al-Fiqh or the principles of Islamic Jurisprudence nor by the Fiqh rules.
Allah Almighty knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.