What is Islamic banking? Does Islam permit to take a mortgage? What does Islam say about life insurance? May Muslims make money by investing in shares? Have you ever asked yourself any of these questions? Then let’s try to find the answers together. To that end, we are launching a whole series of materials with experts in Islamic finance that will allow us to have a closer look at the pitfalls in the field of economics. Our today’s guest is Kamilla Khayretdinova, a specialist in Islamic finance and property relations.
-How are different the Islamic financial system and the “Western” one that familiar to the entire world? What are the key points if a Muslim wants to invest his or her money in anything? What should be considered first of all?
-First and foremost, usury is excluded (one of its types – repayment of a loan with interest when there is no risk). Besides, fraudulent schemes are immediately ruled out, there should be no unfairness and excessive uncertainty. For instance, in the world there is still buying and selling of certain breeds of dogs that have not been born yet. Islam forbids such transactions because one cannot sell anything that does not exist. Earning money from a random event – a lottery, casino - is also excluded. It is forbidden to run business with goods that are forbidden in Islam (alcohol, pork, etc.).
-And what does the Sharia say about the possibility of buying shares and securities?
-There is an existing fatwa of the Council of the Islamic Academy of jurisprudence (fiqh) (Jeddah, the Kingdom of Saudi Arabia) on this issue. It says that such financial instruments as shares can be issued and purchased. New products are regularly emerging in the financial field, so such a decision on the permissibility of investing in one instrument or another is preceded by responsible work by scholars.
A number of conditions must be met when investing in shares. Firstly, this is about the scope of a company itself. If it is engaged in the activity that is permissible under Islam, there are no prohibitions in this case. If an organization is based on products or activities that are forbidden in accordance with Islam, then there is an unequivocal prohibition to participate in this kind of business. However there is also a third option, when not all of the products produced or sold by an organization are of the forbidden nature. In this case it is necessary to calculate the ratio of prohibited income to total income. If it does not exceed a certain percentage (for instance, in some methodologies 5%), then it is possible to invest in such company. But it is imperative that the income is cleared in a certain way.
There are many methodologies approved share selection methodologies around the world that are consistent with Islamic law. The activities of special organizations, Islamic indices, and standards are subject to study in order to understand the subject.
-We are speaking about investments from Islamic perspective. But is there a separate Islamic securities market?
-There is no separate specialized market as such, where absolutely all shares and securities meet the Sharia. But talking about a certain “corner” on it, there is such a practice, for instance, in Dubai. It is a subdivision of the stock exchange with securities allowed by Islam. However in our case (this is about the post-Soviet space) there is no separate market. As a rule, permissibility of buying securities is established using various indices (that is, permissible companies are selected and included in this list). In Russia, the permissibility of shares is verified by criteria or by using special selection services and we end up with a specific list of allowed shares.
-What is necessary for investments?
-First of all, I would advise to study the Sharia standards of the AAOIFI organization. They contain such information as recommendations on buying currency and reveal the nuances of investing in shares. One can also refer to the works of Mufti Taqi Usmani, an internationally recognized specialist in Islamic finance.
-Let’s imagine the situation: one Muslim has given his money to another one for safekeeping. Does the one entrusted with the property for safekeeping have the right to invest it somewhere else?
-Here it is crucial to understand the agreed conditions. If the person initially gave money only for safekeeping, then, of course, no manipulations with them are allowed. But if there is an agreement to invest, it is another question. Partners can come to terms with each other to share profits and losses in a certain way. But again, everything must be discussed/spelled out right away. I would also advise that a contract between parties must be made.
-How popular is investing, buying securities and shares in Muslim community today?
-Now stock investing among Muslims is gaining popularity: at the present moment, about half of the questions I am asked through social networks and in person are about investing. It seems to me this is connected with the fact that in terms of finance, many Russians are oriented towards products common in the USA, which is very developed there: a lot of people actively invest in shares, almost since they were teenagers, people in the states have their own portfolios. This is new for us. Previously this always was a source of concern and disapproval due to the consequences of the 90s, and only now this is being tested by the population, including Russian Muslims. There is a common misconception that this is very simple and suitable for everyone. But people are unaware of how much preparatory work needs to be done to start investing wisely in shares. I vividly remember the speech of one of the professional investors at one of the lections during my studies in Moscow. He read aloud a regret-filled letter from the person, who, as far as I remember, had lost everything because of his way of buying financial instruments and remained in debt forever.
To begin with, a person needs to develop a stable skill to save money, so that a certain financial cushion can emerge. This is important because in case of emergency one will not have to pull money out of shares and break the strategy, which is designed for a long term. One has to learn how to manage the money you have now and distribute it properly. This is about financial planning. Investments are the second step, when you have already learnt to understand what and how to do with money and allocate available funds wisely.
The interviewer: Ilmira Gafiyatullina
Photo: Creative Commons