182 AN INTRODUCTION TO ISLAMIC FINANCE
regarding buying and selling stocks are largely treated under the former,
while shareholder rights and basic investment operations are treated under
the latter. This adds to the confusion surrounding the issue. Shabsigh (2002)
argues that classifying the joint stock company as musharakah mulk renders
most transactions in a stock market illegal from the Shari’ah’s point of view.
Negotiability and Tradability
The third, and most critical, structural issue to be resolved is related to the
negotiability, transferability and tradability of stocks in primary and second-
ary markets. While Islamic law encourages trading and markets in all tangi-
ble goods and properties, it restrains, if not prohibits, the trading of fi nancial
interests under the suspicion of trading leading, through a back door, to
the prohibited element of riba. The law blocks trading in monetary obliga-
tions (such as dayn (debt), currency, or equivalents of currency), obligations
demarcated in generic goods (for example, so many bushels of a particular
grade of wheat), and even contingent or future rights generally. For example,
the Shari’ah ruling being followed at present is that the stocks of a company are
negotiable only if the company owns some non - liquid assets. If all the assets of
a company are in liquid form (that is, money), the stock cannot be purchased
or sold other than at par value. With the changing economic structure where
there is a large number of economic entities engaging in providing services and
holding illiquid assets, this poses serious problems. Consequently, a fi nancial
intermediary cannot exist in the form of a public company.
In addition to these structural issues, there are several operational
aspects of conventional stock markets which are in direct confl ict with the
principles of Islamic markets. The following three operational differences
are noteworthy.
Margin Accounts
First, the widely accepted practice of maintaining a margin account to pur-
chase stocks can be questioned. Since margin accounts allow a buyer to
purchase stocks using leverage and borrowed funds at the prevailing inter-
est rate, this arrangement cannot exist in the Islamic economy. The usage of
leverage in stock trading will eliminate a large number of buyers from the
market, which in turn will directly hamper the liquidity in the market and
result in a higher transaction cost and operational ineffi ciency.
Speculative Trading
Second, it is argued that trading in the stock markets opens the door to
speculation and leads to practices amounting to gambling — another ele-
ment strictly prohibited in Islam. The practice of day trading, which is
popular in the conventional markets, raises the question of speculation.
Earlier researchers in Islamic economics raised the concern that trading in
stock markets is speculative and may contain the element of gambling, and