Question:
Is it permissible to own stocks in an investment bank, such as Citigroup? Investment banks work differently than conventional banks, so is there a difference in ruling?

Answer:
In the Name of Allāh, the Most Gracious, the Most Merciful.
As-salāmu ʿalaykum wa-raḥmatullāhi wa-barakātuh.

Before exploring the permissibility of specific stocks, it is important to understand the views of the ʿulamā on the permissibility of owning stocks in general.

Permissibility of Owning Stocks

There are pious and erudite muftīs on both sides of this issue. Some are of the opinion that owning stocks is impermissible, and others hold it to be permissible with some conditions. Muftī Taqī ʿUthmānī حفظه الله is of the opinion that owning stock is permissible on four conditions[1]:

1. The core business (primary activity) of the company should be in accordance with the Sharīʿah. Therefore, it is not permissible to own stock in companies whose main income is derived from ḥarām things such as providing services on interest, casinos, pork, liquor, and other ḥarām food and drink.

• Note 1: The core business being Sharīʿah compliant is defined as “the corporation does not state in its memorandum of association that one of its objectives is to deal in interest, or in prohibited goods or materials like pork (swine) and the like.”[2]
• Note 2: The core business is different than the majority of the business. No more than 5% of the company’s total income is allowed from a prohibited source.[3]

2. If, despite the core business being ḥalāl, the company engages in interest-bearing transactions, the shareholder should express their disapproval – preferably by raising their voice in the shareholder meeting.[4]
3. If some of the company’s income is from interest, the percentage that interest makes up of the company’s total income must be deducted from the dividends received and then donated.[5] For example, if 5% of the company’s profits are from interest, 5% of the value of dividends received must be given in charity.

• Note: Most who deem this permissible stipulate that the interest-earning deposits to total market capitalization ratio must be less than 30% and the interest earned on these loans should be less than 5% of total revenue.[6]

4. The company must have some non-liquid assets – although there is not a set percentage that non-liquid assets must make up of the company’s total assets:

• The amount of non-liquid assets should not be insignificant.
• The price of the stock should exceed the proportion that liquid assets comprise of the stock.

o For example, if a share of stock has the value of $100 in which $75 is cash and $25 represents non-liquid assets, the stock could not be sold for $75 or less.[7]

If these conditions are met, owning stocks (whether individually or in a mutual fund[8]) will be permissible.

• It should be noted that the sale of options, short sales, future sales, and forward sales are not permissible.[9]

Conventional and Investment Banks

Conventional (commercial) and investment banks differ in several aspects.[10]

Is it Permissible to Own Stocks in an Investment Bank?

With the two prefaces in mind, we come to the question at hand. On a surface level, investment banking seems to be concerned with providing services rather than profiting from interest. However, it is not possible to give a general answer to this question because the services that investment banks provide vary widely – they customize services for their clients. As a result, it is very possible that they may facilitate or engage in ḥarām transactions. Furthermore, the line between commercial and investment banking is frequently blurred. Most countries, Canada included, allow banks to combine commercial and investment banking.  America and Japan were the only two industrialized nations that legally required separation between commercial and investment banking.[11] With the repeal of the Glass-Steagall Act in 1999, America also began to allow banks to combine commercial and investment banking.[12]

Taking these factors into consideration, it is not possible to make a general statement about the permissibility of owning stock in an investment bank. It does however seem likely that an investment bank would provide commercial banking services which would then make owning the stock impermissible. If there is a specific stock that you are interested in, please contact us again and provide the relevant information.

And Allāh Taʿālā Knows Best

Muftī Mohammed Wahaajuddin
Farmington Hills, Michigan, USA

Checked and Approved by:

Muftī Faisal bin Abdul Hamīd al-Mahmūdī
Darul Iftaa Canada (www.fatwa.ca)
—

[1] An Introduction to Islamic Finance by Muftī Taqī ʿUthmānī, Pages 207-210, Maktaba Ma’ariful Quran

[2] AAOIFI Shari’ah Standards, Standard 21, 3/4/1, Page 563

[3] AAOIFI Shari’ah Standards, Standard 21, 3/4/4, Page 563

Islamic Finance (Meezan Bank-2015 Edition) Page 289, Maktaba Ma’ariful Quran

[4] فقه البيوع،  ١٦٨-بيع أسهم الشركات، ص٣٨٢، مكتبة معارف القرآن
إن حامل السهم يجب عليه أن يرفع صوته في الجميعة العمومية ضد الإققراض أو الاقتراض الربوي

[5] فقه البيوع،  ١٦٨-بيع أسهم الشركات، ص٣٨٢، مكتبة معارف القرآن
ولكن إذا رفض صوته بالأغلبية، ودخل هذا الكسب المحرم في أرباح الشركة، فإنه يجب عليه أن يتخلص من هذا الكسب المحرم بالتصدق بما يساوي حصته من الإيراد الذي دخل في الشركة تبعاً من خلال هذا الإيداع.

[6] فقه البيوع،  ١٦٨-بيع أسهم الشركات، ص٣٨١-٣٨٢، مكتبة معارف القرآن
أما إذا كانت الشركة نشاطها التجاري حلالاً، ولكنها تودع فائض نقودها في البنوك الربوية، وقد تقترض منها قروضاً ربوية، فاختلفت أنظار الفقهاء المعاصرين في جواز شراء أسهمها. فقالت جماعة من العلماء: إنه لا يجوز شراء أسهمها، لأن حامل السهم يشارك في هذه العمليات المحرمة، فكان مثل شراء أسهم الشركات التي نشاطها التجاري حراماً. وقال الآخرون: إن إيداع فائض النقود في البنوك الربوية عملية منفلصلة عن نشاطها التجاري، فلا يؤثر على أصل النشاط، بشرط أن يكون قليلاً بالنسبة إلى نشاطها الأساسي، وقدره أكثر المجيزين أن يكون مثل هذا الإيداع أقل من ثلالثين في مائة بالنسبة إلى قيمة موجوداتها، والعائد الناتج منها أقل من خمسة في مائة من مجموع إيرادتها.

AAOIFI Shari’ah Standards, Standard 21, 3/4/3, Page 563

Islamic Finance (Meezan Bank-2015 Edition) Page 291, Maktaba Ma’ariful Quran

[7] Islamic Finance (Meezan Bank-2015 Edition) Page 294 Maktaba Ma’ariful Quran

Share Trading (albalagh.net)

[8] Islamic Finance (Meezan Bank-2015 Edition) Page 287-300 Maktaba Ma’ariful Quran

[9] Islamic Finance (Meezan Bank-2015 Edition) Page 296 Maktaba Ma’ariful Quran

[10] https://www.investopedia.com/ask/answers/061615/whats-difference-between-investment-banks-and-commercial-banks.asp

https://www.investopedia.com/articles/company-insights/092016/how-investment-banks-make-money-jpm-gs.asp

https://www.investopedia.com/terms/i/investmentbank.asp

The advisory divisions of investment banks are paid a fee for their services, while the trading divisions experience profit or loss based on their market performance… Investment banks’ clients include corporations, pension funds, other financial institutions, governments and hedge funds. Size is an asset for investment banks. The more connections the bank has within the market, the more likely it is to profit by matching buyers and sellers, especially for unique transactions. The largest investment banks have clients around the globe.

Investment banks help corporations issue new shares of stock in an initial public offering or follow-on offering. They also help corporations obtain debt financing by finding investors for corporate bonds. The investment bank’s role begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. The investment bank will also examine the company’s financial statements for accuracy and publish a prospectus that explains the offering to investors before the securities are made available for purchase.

[11] https://www.stlouisfed.org/publications/regional-economist/april-1995/commercial–investment-banking-should-this-divorce-be-saved

[12] https://www.federalreservehistory.org/essays/glass-steagall-act