SS 21 · Islamic financial markets

SS 21: Financial Paper (Shares and Bonds)

What this standard is about

SS 21 answers a practical question for Muslim investors: which shares and bonds are halal (permissible under Islamic rules)? It covers buying, holding and trading company shares, and it covers bonds and similar paper securities.

Shares represent ownership in a company. The standard treats them as permissible when the company's main business is halal. A shareholder owns part of the business and shares its results.

Bonds that pay fixed interest are riba (interest). Islamic law forbids riba. The standard therefore does not permit ordinary interest-bearing bonds.

Why it exists

Without clear rules, investors could not tell whether a stock or bond complied with Islamic law. Markets needed one shared checklist so banks, funds and individuals could screen securities the same way.

The standard also protects investors from income that is not permissible. Even a halal company can earn some interest or incidental non-compliant income. The standard tells investors how to handle that.

The key rules, simply put

Shares of a company are permissible when the company's main business is halal. Companies in alcohol, pork products, conventional banking and insurance, weapons, gambling or pornography fail this test.
The company must not carry too much interest-based debt. The limit is 30% of the company's market value (its total share price value).
The company must not hold too much interest-based cash and deposits. The limit is 30% of market value.
Income from impermissible activities must stay small. The limit is 5% of the company's total income.
Dividends that include non-compliant income must be purified. The investor gives that portion away to charity, because keeping it is not allowed.
Ordinary bonds that pay interest are impermissible, because interest is riba.

An everyday example

An investor wants to buy shares in a soft-drinks company. First she checks the business: soft drinks are halal. Then she checks the accounts: the company's loans are under 30% of market value, its interest-bearing deposits are under 30%, and its income from non-compliant sources is under 5%. The shares pass the screens. If the company later earns a little interest income and pays it out in a dividend, she calculates her share of that interest and gives it to charity. She keeps the rest of the dividend.

Words to know

Halal — permissible under Islamic rules
Haram — forbidden under Islamic rules
Riba — interest, or any guaranteed excess on a loan; forbidden in Islam
Market value — the total value of all a company's shares at current prices
Purification — removing the non-compliant part of an investment return by giving it to charity
Screening — checking a security against a set of Shariah criteria before buying it

Source

AAOIFI Shariah Standard No. 21 — https://islamicmarkets.com/standards/aaoifi-shariah-standards/financial-paper-shares-and-bonds/appendix-a-brief-history-of-the-preparation-of-the-19
Fiqh Council of North America, "Halal Stock Investing: Shariah Standards Explained" — https://fiqhcouncil.org/halal-stock-investing-shariah-standards-explained/