Purifying capital gains from stocks

💰 Everyday Islamic Finance Savings & Investing
#1

Salam Alaikum.

I’ve read articles about purifying dividends or capital gains from stocks.

When trading stocks to make capital gains, not dividends, does the financial screening matter?
Because ISRA-Bloomberg says that interest or other income does not affect the price when trading.

Here is what they said;

“ ISRA-Bloomberg opines that there is no need to cleanse capital gains. It is argued that the change in the stock price does not directly reflect interest or other income generated from Sharīʿah non-compliant activities of a company. In reality, the changes in stock price in the market comprise a complex phenomenon that is attributed to multifarious factors, including supply and demand. Therefore, capital gain is not direct income from Sharīʿah non-compliant activities. Moreover, the stock price in the market basically reflects the price that the buyer is willing to pay to acquire those shares. It would be far from reality to think that the investors consider interest or impermissible income during trading shares as the principal factor or objective of the transaction, especially when it is in a negligible amount (less than 5 per cent of the total revenue in this case). This opinion is based on the Islamic legal maxim stating:
يغتفر في التابع ما لا يغتفر في المتبوع
Something can be forgiven as the subsidiary which cannot be forgiven as the principal (Al-Zuhayli, 2006, vol. 1, p. 447).

The above maxim proposes that when a factor or element is subsidiary to a principal factor or element, it might be overlooked in issuing the Sharīʿah ruling for the whole case, whereas that element cannot be overlooked otherwise. Putting it in the context of cleansing capital gains, it can be said that the interest or impermissible income is definitely a subsidiary factor. Therefore, it seems more appropriate to exclude capital gains from the income cleansing process.” - opinion of ISRA-Bloomberg

In another blog, Mufti Faraz Adam says “Capital gains are not subject to purification of companies whose primary business activity is Halal. Only impermissible revenue is to be purified by a shareholder.” Notice the fact he says purification for shareholders which means dividends, not for capital gains.

Does this mean if I’m a stock trader, not an investor then I don’t have to look at the financial screening of a stock since it does not affect the stock price? Based on the opinion of ISRA-Bloomberg.

From my own understanding, based on what ISRA-Bloomberg and Mufti Faraz Adam says, only the business activity screening should be considered for traders earning capital gains since financial activity of the company does not affect the stock price.

Whilst investors earning dividends, should look at both business activity screening and financial activity screening as they make direct income from both activities.

#2

Mufti Faraz is pretty clear that when buying a stock, one needs to do the financial screening first.

We don’t need to infer it from something else he’s said…he specifically says we need to do financial screening when buying a stock.

Which is the same stance as AAOIFI etc.

#4

For an investor, yes from what I read, business and financial screening is required.

ISRA-Bloomberg has made it clear that there is no connection between capital gains and the financials of a company, only the business activity is required to be compliant.

If you read what ISRA-Bloomberg says, they say when trading and earning capital gains, the financial activity of a company isn’t required to be considered since interest or any other type of income isn’t reflected on the stock price. Hence why capital gains are exempt from any purification as long as the stock is shariah tolerant.

An investor becomes a shareholder after investing in a company for dividends, so any activity carried out by the company directly benefits the investor. Hence why dividends must always be purified before consuming.

So based on their opinion, you can understand that when trading stocks for capital gains, only the business screening is to be considered since financial activities such as interest income does not affect the trading price.
Dividend investors should consider both screenings since they directly benefit from company activities.

This can be easily understood after reading the ruling by ISRA-Bloomberg.

Note: ISRA-Bloomberg is by the International Shariah Research Academy for Islamic finance.

#6

Not sure why you are saying financial screening is only for “investors”, when neither ISRA-Bloomberg and Mufti Faraz say that. They explain the rules for financial screening, and they don’t exclude any type of investor from that. Not sure why we need to infer something from the rules of purification, when they directly explain the financial screening rules.