Fatwa ID: 03687

Answered by: Imam Abdul-Malik Sheikh

Question

Dividends stocks pay the shareholder a certain amount of money every couple of months (if the shareholder holds the stock and doesn't sell it). For example, if a stock is £50, the company might pay the shareholder £5 every month for as long as the shareholder has the stock. Is this interest?

بِسْمِ اللهِ الرَّحْمنِ الرَّحِيْم

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

Answer:

Dividends are usually paid from the profits of stock shares to the shareholders. Normally, such dividends would be considered permissible. The proportion of profit must be agreed upon at the time of contracting. However, if the profit is generated through interest, then the dividends will not be permissible.

According to Shari’ah, the returns of joint ventures (Mushārakah) are to be based on actual profit and not interest. Furthermore, all shareholders will bare the profit or loss and therefore the amount of profit cannot be fixed. Interest-based ventures predetermine a fixed rate of return regardless of loss or profit and this is not permissible.

In Islamic finance, the ratio of profit for each shareholder must be determined in proportion to the actual profit accrued to the stock, and not in proportion to the capital invested by each person. It is not allowed to fix a lump sum amount for anyone of the partners, or any rate of profit tied up with his investment.*

*See ‘An Introduction to Islamic Finance’ by Mufti Muhammad Taqi Usmani p.17-21

Only Allah knows best

Written by Imam Abdul-Malik Sheikh

Checked and approved by Mufti Mohammed Tosir Miah

Darul Ifta Birmingham