What is the Permissible Level of Debt for Companies to have in order to Invest in them?

Fatwa ID: 03643

Answered by: Maulana Shadman Ahmed

 

Question

This question revolves around if there is a permissible level of debt companies can have in order for us to invest in the company. It’s pretty tough to operate a business in this climate at the level of growth investors expect without some level of debt being taken on by a company. There are extreme cases, wherein my view, it is black and white (example: a bank, where the entire business operates around interest). But if a company that provides consumers with household goods has a mortgage for its factory, does that taint all of the income from that business and make it forbidden for an investor?

 

بِسْمِ اللهِ الرَّحْمنِ الرَّحِيْم

In the name of Allah, the Most Gracious, the Most Merciful

 

Answer:

Muftī Taqī Uthmāni explains in his book, An Introduction to Islamic Finance, regarding businesses that operate with all the transactions in full conformity with Shariah are very rare in the contemporary stock market. This is why he mentions, “Therefore, if a company is engaged in a halal business, but also keeps its surplus money in an interest-bearing account, wherefrom a small incidental income of interest is received, it does not render all the business of the company unlawful. Now, if a person acquires the shares of such a company with the clear intention that he will oppose this incidental transaction also, and will not use that proportion of the dividend for his own benefit…” Thereafter Muftī Taqī states 4 conditions for this to be valid.

  1. The main business of the company is not violative of Shari’ah.
  2. If the main business of the companies is halal, like automobiles, textile, but they deposit their surplus amounts in an interest-bearing account or borrow money on in interest, the shareholder must express his disapproval against such dealings, preferably by raising his voice against such activities in the annual general meeting of the company.
  3. If some income from interest-bearing accounts is included in the income of the company, the proportion of such income in the dividend paid to the share-holder must be given in charity and not be retained by him.
  4. The shares of a company are negotiable only if the company owns some illiquid assets. If all the assets of a company are in liquid form, then it cannot be purchased or sold except at par value, because in this case the share represents money only and the money cannot be traded in except at par.” (Pg. 140-144)

It has been also mentioned that the ratio of debt approved by Muftī Taqi is 33%. In conclusion, if a company provides consumers with household goods has a mortgage for its factory, it will be permissible due to the reasons and conditions mentioned above.

 

 

Only Allah knows best

Written by Maulana Shadman Ahmed

Checked and approved by Mufti Mohammed Tosir Miah

Darul Ifta Birmingham

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