Q&A: Why are PLC's & buying shares in them haram?

The following is the answer to a question we received from a participant of one of our recent seminars.

Question: Please can you clarify why Public Limited Companies (PLC's) i.e. stock market companies are prohibitted in Islam and why trading in shares in them is haram as well.

Answer: The public limited company system gives the public company a distinct quality of limited liability, aimed at protecting major capitalists and businessmen in case the company fails and incurs losses, in which case, those who have claims against it would not be able to demand from its investors any compensation no matter how large the personal assets of the investors are. The financial claims are only confined to what is left in the company in terms of assets.This system is contradictory to Shari'ah in every aspect.

The Shari'ah rule obliges all to repay debts in full to the rightful owners, and it is forbidden to cut anything from them.

Al-Bukhari reported on the authority of Abu Hurayrah that the Messenger of Allah (saw) said: "He who takes money from people with the intention of paying it back Allah will pay on his behalf, and he who takes it with the intention to waste it Allah will waste him."

Ahmed also reported on the authority of Abu Hurayrah who said: The Messenger of Allah (saw) said: "You shall return the rights to their rightful owners on the Day of Judgement, even the ewe with no horns will get even with the ewe with horns by butting it back."

Hence, the Messenger of Allah (saw) has confirmed the obligation of fulfiling one's rights in full in temporal life, and if one does not he will do so on the Day of Judgement. This serves as a warning for those who devour people's rights.

The Shari'ah has made it an unjust act for the rich to delay the settlement of their debts.

Al-Bukhari reported on the authority of Abu Hurayrah who said: The Messenger of Allah (saw) said: "The delay by the rich is unjust."

If the delay in settling the debt is unjust, what would the devouring of the rights and the non settlement of the debts be?

Indeed it would be a greater injustice and would entail a graver punishment. The Messenger of Allah (swt) has taught us that the best people are those who are best when it comes to settling their debts, for Al-Bukhari reported that the Messenger of Allah (saw) said: "Truly the best from amongst you are those who are best in settling debts."

Therefore to restrict the settlement of debts to those who have claims against the company, only after clearance of the public company's losses, is forbidden. Rather they should be given all that is owed to them in terms of rights or debts in full from the assets of the investors.

This is as far as granting the public companies a limited liability. As for the public limited companies themselves, they contradict the rules of companies in Islam. This is so because the public company according to their definition : "A contract in which two or more persons undertake that each one of them participate in a financial project, by tendering a sum of money, thus sharing what this project yields in terms of profit or loss."

According to this definition and according to the reality pertaining to the founding of the public company or the Joint-Stock Company, it becomes clear that it is not a contract between two people or more according to the Islamic Shari'ah rules, because the contract according to Shari'ah is based on offer and acceptance between two parties. In other words it means that there should be two parties in the contract. One party assumes the offer, i.e. he initiates the offer of the contract by saying: "I enter into partnership with you" or words to this effect; and the other party expresses acceptance by saying: "I accept" or "I consent" or words to this effect. If the contract is lacking the presence of two parties and the presence of offer and acceptance, nothing can be contracted and nothing can be called a legitimate contract.

The reality of the public company contradicts the reality of the company in Islam. The company in Islam is: "A contract between two or more parties, who agree to undertake a financial venture with the aim of making a profit." It is therefore a contract between two or more parties; thus it could not be unilateral. An agreement should rather take place between two or more parties. The contract itself should be based on the undertaking of a financial transaction with the aim of making a profit. It is not fitting for the contract to be based on the mere payment of money. It is also not fitting for the aim to be just for the sake of entering into a partnership. Hence, undertaking the financial venture is the basis in the company contract.

In the public companies, partnership is concluded by the mere presence of partners in capital only. The public company assumes its activities without the presence of a physical partner. According to Shari'ah, the partner in capital, has no right to run the company, nor does he have the right to work in the company as a partner. The running of the company and working in the company is confined to the physical partner only.

As for the shares of such companies, these are financial papers representing a share in the company at the time of purchase or at the time of evaluation. They do not represent the capital of the company at the time of establishment. The share is an integral part of the company's entity and it is not part of its capital. The value of the shares is not unique nor is it stable. It rather varies according to the profits and losses of the company. They are not unique and fixed at all times, but they are constantly fluctuating.

As for the Shari'ah rule pertaining to the dealing in these shares and in securities, whether buying or selling, it is forbidden. This is because these shares are those of a company that is unlawful according to Shari'ah. They are in fact certificates of bills which contain mixed sums from a lawful capital and unlawful profits made from an unlawful transaction. Each bill represents the value of a share, and this share represents part of the assets that belong to the unlawful company.These assets have been mixed with an unlawful transaction which Shari'ah has prohibited. Thus, it is illicit money, whose buying and selling becomes unlawful, and dealing in such money is also illicit. This is also the case for bonds, in which money is invested with interest, and so is the case for bank shares and similar, since they all contain sums of illicit money; thus their buying and selling is unlawful, because the money contained in them is illicit.