Are the following investment schemes permissible? Fedgroup and EasyProperties

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

1.      Each investment scheme’s shari’ah compliancy will have to be judged on an individual basis. The investment scheme will have to be judged according to its investment model and its terms and conditions.

Accordingly, we have reviewed the impact farming venture of Fedgroup, and we have concluded that it is not shari’ah compliant.

2.      Initial public offerings(IPO’s) are simply companies selling its shares to the public for the first time. As such all the rules that apply to investing in shares will apply to them as well.

With regard to EasyProperties, they set up a company which owns a single property. Thereafter, they sell shares of that company to the public.

It will be permissible to invest in EasyProperties subject to the following conditions:

1.      That the collective amount raised as loans on interest does not exceed 30% of the total assets of the company.

2.      That the total amount of interest-bearing securities, whether short, medium or long term does not exceed 30% of the total assets.

3.      That the amount of income generated from prohibited sources does not exceed 5% of the total revenue of the company.

If all the above conditions are duly satisfied, then it will be deemed to be Shari’ah compliant. ^[1][2]

And Allah Ta’āla Knows Best

Abu ‘Umar Muhammad bin Zayn Patel

Student Darul Iftaa
South Africa

Checked and Approved by,
Mufti Ebrahim Desai.

[^[1]]

 اسلام اور جديد معاشي مسائل (مفتي تقي عثماني) pg. 160-164

AAOIFA, Shariah Standards (2015) pg:562-568 [2]

[3] المعايير الشرعية pg. 363-36

Fatwa of Mufti Faraz Adam [4]

The above financials are Ijtihadi in reasoning and slightly differ among scholars and institutions, however, there is very little variance between the various screening criteria. The following Shariah screening criteria are very similar and are commonly referred to:

Accounting and Auditing Organisation of Islamic Financial Institutions (AAOIFI); (ii) Dow Jones Islamic Market Indexes (DJIMI); (iii) Kuala Lumpur Shariah Index (KLSI); (iv) Financial Times Stock Exchange Shariah Global Equity Index (FTSE); (v) Standard & Poor’s Shariah Indices (S&P); (vi) Morgan Stanley Capital International World Islamic Indices (MSCI); (vii) Thompson Reuters Ideal Ratings Islamic Indices; (viii) STOXX Europe Islamic Index; and (ix) ISRA Bloomberg Shariah Stock Screening Indices (x) Al Meezan.

This is an Ijtihad of contemporary scholars. A few decades ago, scholars faced this issue where the majority of the listed companies had interest-bearing debt and interest receivables. Keep in mind, equity is an important diversification of investment portfolios. Thus, the scholars saw that there was Umumul balwa (widespread exposure) and this cannot be resisted unless one adopts a nomadic approach to business and finance. Therefore, the scholars at the time were of the view that there should be some allowance and concession to invest in equities since there was rarely any alternative for listed companies to keep deposits in other than interest-bearing accounts(as Shariah compliant banks were few in the west in the early 90s), many of the listed companies were non-Muslims, there was many a time that the companies took loans because they was a genuine need for financing. However, the challenge they faced was determining an acceptable threshold. Some proposed 49% as that is the final number to remain a ‘minority’. However, others argued that the Hadith has mention of 1/3 being sufficient and excessive in the following narration:

Sa’d said: “I was stricken by an ailment that led me to the verge of death. The Prophet came to pay me a visit. I said, ‘O Allah’s Apostle! I have much property and no heir except my single daughter. Shall I give two-thirds of my property in charity?’ He said, ‘No.’ I said, ‘Half of it?’ He said, ‘No.’ I said, ‘One-third of it?’ He said, ‘You may do so, though one-third is also excessive. (Bukhari)

Based on the above, scholars felt that there is a reference to excessiveness in the sacred text, so it would be more prudent to adopt one-third as a benchmark for excessiveness.

Although 30% is not one-third, 30% was seen as a reasonable standard just below one-third to prevent the “excessiveness” from being within touching distance.

Although this is an Ijtihadi issue, since then, the majority of scholars have adopted this view and therefore the view has gained further strength and is now a standard based on widespread scholarly acceptance and approval.