Equity Markets the Shariah way is the Best Investment Option for Muslim

Equity Markets the Shariah way is the Best Investment Option for Muslim
By Imtiaz Merchant MD -- Pragmatic Wealth Management P. Ltd

Editor of Islami Tijara Magazine & promoter of Adaaf advisory services

Muslims should take advantage of the boom witnessed in the Indian Equity markets and they should not be left behind in the economic growth that is being witnessed throughout the country as it is likely to continue for years to come. India is one of the fastest growing nations in the world with GDP growing at about5 to 6 % for 2019-20 and expected to grow above 6to 8in 2021 onwards. To be part of the main stream of the economy and get equal investment opportunity, Equity stock markets (The Islamic way) provides the most cost-effective investment solution. Equity markets have proved that they are not only the most cost effective, transparent, liquid and most conducive to small and big size investors as a means of investment but also history has proven that it outperforms and gives better returns than all other asset classes where return on investment as a parameter is considered. And in the long term in a developing economy, equity (stock) market always goes up and up, though volatilities are not ruled, so considering the inherent benefits Muslims must invest in the Equity Market.

On the onset, Investment in equity markets is Islamically permissible since it is based on Musharaka (Partnership) principle where, the profit is earned with the risk of loss, wherein profit and losses are shared (PLS). With Ulema’s (Islamic scholar) guidance and approval it is now possible to invest in Equity markets with some stipulated conditions, and in fact Investment in equity markets the Islamic way is probably the best and only option available for the Muslims in a regulated environment. The government body SEBI being liberal about Shariah based investment makes it more lucrative to invest in equity markets. Equity market is very liquid, your sale proceeds gets credited in your account in three days.

One more point that goes in the favor of equity Investment is the Capital gains tax. The long-term capital gains tax is just 10 % that too if the gains are above 1 Lac i.e. if the investment is held for more than one year. And the short-term investments for less than a year, investors is obliged pay only 15 % percent tax on its gains on booked profit after deducting losses and expenses. Muslims must take advantage of this tax benefit and invest in equities that would help them create wealth in the long term, that too in the Shariah way.

Role of Shariah Scholar
Islam makes ‘Lawful Earning’ (Halal) mandatory and this implies that Islam emphasizes the need to make a living by means that are permissible under it. After many years of debate and discussions and looking into the need for Muslims to Invest, Equity markets have proven as the best option. Islamic scholars have permitted Muslims to invest in equity markets with certain strict stipulated conditions.

Shariah scholars have imposed investment restriction and conditions and only upon fulfilling these conditions can Muslims invest in equity markets the Halal way.

1.Fixed Interest (Riba) Based Investments (Banks)

Fixed Interest (Riba) based investments like the Saving Bank deposit, Bank FDR; Postal savings, Debentures, Bonds are strictly prohibited in Islam. Allah says in the Holy Quran,‘O those who believe, do not eat Riba (usury or interest) multiplied many times. And fear Allah, so that you may be successful.’ (Holy Quran Al-Imran verse 130). ‘Profit should be earned with the risk of losses’,in equity investment the profit and loss are shared in proportion to the investments made.

2.  Investment in Real Estate

Investment in Real Estate / Properties, although permissible in Islam, but has many disadvantages over equities. Equity Market is well regulated by SEBI and Real Estate market is yet not regulated by any institute. Unit size is concern it is not possible for every individual to buy property since the investment involved is huge, whereas one can invest in equity for an amount as low as Rs.1000/- Property is subject to a lot of legal paper work and it is a very cumbersome procedure to acquire properties. However, it is very easy to buy and sell shares by becoming the member of a SEBI registered broker. Thus buying and selling shares is as easy as snapping your fingers. Equity shares purchased get deposited directly in the investor's D-mat account. One can make partial withdrawals from equities and get the sales proceeds in maximum three days (T+2), partial withdrawals are not possible in real estate & properties. And the sales proceeds often take long time.

3. Investments in Conventional Mutual Funds

Investments in Conventional Mutual Funds is not permissible from the view point that these mutual funds are not mandated to follow Shariah norms thus they even invest in stocks of prohibited businesses like Liquor, Banks, Hotels, Entertainment, Cinema, Casino etc. which are strictly prohibited in Islam, and hence profit earned from these mutual funds is impure and tainted. And moreover, since about 45% of the Market Capitalization is Shariah Non- Compliant, presumably almost 40 to 45 % returns earned is not  Halal, hence this option too is not Shariah compatible for Investments.

4. The condition laid by Shariah scholars

Restriction based on the type of Securities: Investment should only be done in Shariah compliant stocks as defined. A security trading in derivatives and day trading in stocks is strictly not permitted. Short selling is prohibited. Securities should only be sold after having its complete possession.

Restriction on Business Activity: No investment shall be made in stocks of the companies whose business activity is Prohibited (Haram)

Restriction based on financial ratios: Apart from the above restriction, Islamic scholars from different part of the world have set certain financial criteria based on the need and essentiality.

In conclusion, we can confidently and profoundly say that Equity investment, the Islamic way, is the Best option available to Muslims to park their savings. The investment in the company is well regulated by SEBI and approved by Shariah scholars, equity shares are liquid enough to withdraw as and when one desires, it is transparent, safe in D-mat A/c, lower Taxes, and least cumbersome.