Investment Need For Purify Return

Introduction

Purification process usually involves the application of Shariah principles in determining the permissibility of share trading. It deals with the valuation of stocks along Shariah guidelines. In this way, it does not concern determining the market values of stocks. However it does not mean that the Shariah is negligence of performance parameters. The purification process is only the beginning of Shariah compliance. Equally important is the wealth creation aspects of stock investment.

In the earlier days, the names like filtration, cleansing and screening process were used to achieve similar objectives. The Securities Commission has played a noble role in setting up the Shariah criteria for listed stocks. In June 1997 the Commission published a list of stocks consistent with the Shariah criteria. Later, by 26th October 2001, 79% of the stocks (i.e. 642) listed in the KLSE were found to comply with Shariah values. Over time, the Commission oversees the purification process by actively pursuing a system of addition and deletion of stocks to ensure full compliance.

The question now is the purification factor market driven? Who needs purification? Assuming that the purification process is market-driven, the issue can be examined from two sides, namely:

1. Demand side : Retail and institutional investors

2. Supply side : Issuing companies (IPOs) and investors (secondary trading).

It is quite obvious that the people wanting to purchase and sell Shariah stocks constitutes the Muslim individuals as well as companies running business under an Islamic label, such as Islamic banks, takaful, Islamic unit trusts and asset management companies. They wanted to make sure that stocks bought and sold are permissible (halal) for fear when God's Law is violated; punishment in the Hereafter is inevitable.

This paper looks at the need for purification from two perspectives. First it deals with the legal factor, namely the Shariah value (hukm shari') attached to the act of buying and selling stocks. Secondly, it examines the ethical factor that ventures into the metaphysical dimension of the self and the factors affecting it. The self is the centerpiece of human motivation. Thus, what compels an investor to purchase Shariah stocks has a lot to do with the self and its objectives.

THE LEGAL FACTOR: The role of 'Aqd (contract)

The need for purification can be made more revealing when decisions of issuers and investors are further investigated. The issue can be more sensitive on the demand side, since investors are particular on what they buy. They are concern whether the profits earned from the investments are halal. The supply side factor however, is relatively silent unless issuers are keen to capture Islamic investors such as the recent PLUS initial public offers.

What is at stake here is a fundamental question, namely the nature of the contract ('Aqd) applied in trading Shariah stocks. Human actions in the Shariah can be categorized into five, namely:

1. Wajib (obligatory)

2. Sunnat (commendable)

3. Makruh (reprehensible)

4. Mubah (permissible)

5. Haram (prohibited)

In defining human actions, the contractual relationship between man and God (hablumninallah) as well as among man (hablumminnanas) is a crucial element to observe. As an example, the consumption of interest as riba, is prohibited (haram) as it both violated the rights of God and the rights of man. In a legal perspective, the contract of an interest-bearing loan is invalid (bathil).The act of lending and borrowing in this respect is not recognized by both God and society. When this happens the act of lending and borrowing with riba will not be rewarded but punishable in the hereafter.

The same applies in Shariah stock trading. If an investor desires to observe the Shariah, he or she must first ask whether the act of sale and purchase of stocks is valid (sah) in the eyes of God. It is here, the 'Aqd factor is most critical. If the 'Aqd is void (bathil), then the act of stock trading is punishable. Like wise if the 'Aqd is valid (sahih), then people who purchase or sell stocks will receive rewards (thawab) from God.

The 'Aqd (contract) for stock trading apparently has not received commendable attention compared with the Shariah criteria of the Securities Commission. In the latter, it seems that the subject matter is the stock (i.e. the financial asset) rather than the contract applied in the sale and purchase of that financial asset. It is thus important to explore what exactly is the nature of contract ('Aqd) applied in Shariah stock trading. The 'Aqd helps determine the Hukm Shari' of shariah stock trading. That is whether the actions of stock trading is accepted or rejected by God is defined by the validity of the 'Aqd. Therefore pinning on the Islamicity of the stocks alone may not suffice in determining the Shariah value (hukm) on the sale and purchase of stocks.

Contract of Al-Bay' (sale and purchase of asset/property)

There are four main principles of 'Aqd (contract),namely:

1. Agents of contract (tharafail aqdi)

2. Objective of contract (mauduul adqi)

3. Object of contract (mahalul aqdi)

4. Offer and acceptance (ijab & qabul)

To secure legitimacy, the contract must be free from the following elements

1.

Interest (riba): contractual increase over capital loan
2.

Gambling (maisir): speculative or aleatory contracts in which obligations and benefits accruing to participating parties are not fully defined at the time when the contract became effective leading to either wining or losing arising from mere chance instead of work and effort.
3.

Ambiguities (Gharar): uncertainties that exists in contracts involving contracting parties and the subject matter, which leads to disputes and unjustified gain
4.

Intoxicants (qamar): consumption of alcoholic beverages, which can impair the intellect ('aql) leading to irrational behavior.
5.

Consumption of pork
6.

Illicit sex (zina) : sexual relation outside marriage which annihilate the sanctity of the family system (nasl).

The two principles of risk-taking (al-bay') and profit-loss sharing (Shirkat) are a given in all contractual obligation. For that reason, the Shariah prohibits interest and gambling. In Islamic law, two popular the legal maxims (Qawaid Fiqiah) highlight the constructiive role of risk-taking in wealth creation :

1. No rewards without risks - "Al-Ghormi bil Ghonm"

2. Profits must be accompanied with liability "Al-Kharaj bil Daman"

A systematic understanding of stocks in Islam can best be acquired by looking at the nature of contract and transaction each party, namely the seller and buyer of stocks have both participated in. If focus is given on stock purification, the trading of stocks in Islam essentially involves the contract of sale (al-bay') since what is taking place is the exchange of financial assets (i.e. Shariah stocks) for money. A share certificate is an evidence of one's ownership of a company, namely ownership of assets. Although the ownership is only fractional but it gives the owners the right to participate in profit making, such as determining company policy by way of appointing company directors. The contract of al-bay' seems fitting since a share certificate is seen to represent assets or property (al-mal mutaqawim) inputed into the production process. In the contract of al-bay' this is called the subject matter or mahallul 'aqdi.

But the ability to participate, say in the election of the board of directors seems to indicate that a person who purchases and owns common stocks, is not comparable to an ordinary consumer or merchant who respectively purchase tangible goods for consumption or trading purposes. So, using the contract of al-bay' may not be an accurate one, to say the least.

Contract of Partnership (Shirkatul 'Inan)

Investment in stocks can also be understood by way of applying profit-loss sharing principle. When a company issues a common share it does so to obtain risk or equity capital from the public. Investors who took up these shares are willing to assume the risk of losing his capital in a hope to obtain higher returns. Investment in stocks is therefore a profit-loss sharing activity, which Islam rightly enjoins. The contracts of profit-loss sharing ('Uqud al-Ishtirak) in Islam shall consists of two, namely:

1. Al-Qirad or Al-Mudarabah (Trustee Partership)

2. Al-Shirkah or Al-Musyarakah (General Partnership)

In Shariah stocks trading, the contract of Musyarakah seems more suitable since it (i.e. musyarakah) deals with a partnership of capital. This is because both issuer and investors injected capital input into the business. The contract of Shirkatul 'inan) unequal partnership of capital is thus relevant here. In short, the contract of Shariah stock trading can be summarized as follows:

Contract of Shirkatul 'Inan

1. Agents of contract : Issuer and investors (IPO)

2. Objective of contact: Profit and loss sharing

3. Object of contract:
1. Capital : Provision of cash or physical assets by both parties

2. Labor : Provision of work and effort by both parties

4. Offer and acceptance : as mutually agreed based on the above terms and conditions.

However, the nature of stock trading assumes that the investors are practically sleeping partners as they do not directly participate in the running of business. The contract cannot assume a Mudarabah relationship given that it (i.e. Mudarabah) only allows one party to contribute capital while the other providing the management role. All Muslim jurists require that partners put both work and effort into the business. Otherwise the contract becomes null and void (AAOIFI 1999).

Further research on the nature of Islamic stock trading and the applicable contracts is crucial. It looks like the contract (if any) assimilates both Musyarakah and Mudarabah features. A hybrid contract is a likely possibility but this needs a playing field at the fuqaha level. Meanwhile Muslim investors are rest assure by the Securities Commission that their act of buying and selling of shares are valid (sah) and thus, acceptable by God Almighty as good deeds ('amal saleh)

THE MORAL FACTOR

Muslim investors desire to know whether the act of buying and selling of Shariah stocks is valid or not valid. The purification process played an important role in putting Shariah legitimacy of Shariah stock trading. The question again, is why Muslims are concern with the haram and halal? If the contract of stock trading is invalid, the act of buying and selling of stocks is therefore a sin and brings along with it a sense of regret, helplessness and loss. In wealth creation, Muslims certainly do not desire these unwarranted stress and grief as opposed to happiness and tranquility.

It seems that an ethical explanation is in order to ascertain the desire for Shariah legitimacy (i.e. the legal factor) via the purification process. The above methods of Shariah screening constitute Islam's way of purifying the soul (tazkiyah an-nafs). These methods are means by which an individual can attain purification of the self. In Islam purification began from within. This is among the central theme of the Quran. That is, the individual strives to purify himself in a way ordained by the Creator. Purifying oneself is the final objective in life achievable by way of submitting one's desires to the Will of God, as embodied in the Shariah. In the end, man shall achieve happiness when the self returns to its true nature.

Submitting one's desire to Shariah values requires a driving catalyst that both motivates and excites the individual to do it with conviction. This is because submitting one's desire to a particular value system needs convincing. Temptations to realize gains through falsehood such as fraud and corruption are overwhelming when less effort is required to obtain them. Income derived from riba and gambling is immoral as both constitute unlawful gains since no equivalent countervalue ('iwad) is evident from the surplus made. Likewise, allowing ambiguities (gharar) in contractual obligations is against to mutual and cooperative values.

Islam as Al-Din means submission. In fact one of the meanings of Din or the Arabic root word DYN, is indebtedness. It is this notion of indebtedness that gives deeper meaning to the reason for human economic existence in Islam. Why is man indebted to God, and what is he supposed to do under such a situation of indebtedness? Logically, when a person is in debt he is supposed to settle it. In Islam man is indebted to God, his Creator and Provider, for bringing him into existence and maintaining him in his existence as man once did not exist, and now he does.

On this point, the Quran states, "Man, We did create from a quintessence of clay. Then We placed him as a drop of sperm in a place of rest, firmly fixed. Then We made the sperm into a clot of congealed blood; then out of that clot We made a lump; then We made out of that lump bones and clothed the bones with fresh; then We developed out of it another creature. So blessed be God, the Best to create". (Al-Mu'minun {23}:12-14).

How is man supposed to repay the debt? God is in no dire need of anything as He is the Creator and Sustainer, but the debt than man owes God must be paid. In Islam, paying or returning the debts means to give himself up in service, or khidmah, to his Lord and Master, to abase himself before Him - and so the rightly guided man sincerely and consciously enslaves himself for the sake of God in order to fulfill His Commands and Prohibitions and Ordinances, and thus to live out the dictates of His Law.

Now it is becomes clear that the meaning of man's existence is related to his indebtedness to God and his subsequent enslavement to His law. Man himself is the object of the debt. In fact the Covenant that man sealed with God in the Primordial stage of life i.e. when He says, 'Am I not your Lord", and man's true self testifying, answered: Yea!", requires man to manifest the Covenant (Al-Mithaq) through his submission in absolute true willingness.

The question now is, how can these meanings of indebtedness via the theory of Al-Mithaq be of significance in explaining the need for purification? The answer lies in the Islamic conception of the self. The Self in the Quran has been mentioned in different levels of man inner experience such as:

1. Human spirit (Ruh)

2. Soul (Nafs)

3. Intellect ('Aql)

4. Heart (Qalb).

Naquib Al-Attas provides a coherent exposition how these different modes of the self is seen as a unity:

"Thus when it (i.e. the human soul) is involved in intellection and apprehension it is called 'intelect'; when it governs the body it is called 'soul'; when it is engaged in receiving intuitive illumination it is called 'heart' and it reverts to its own world of abstract entities it is called 'spirit'. Indeed, it is a reality always engaged in manifesting itself in all these states".

The self was once pure and clean. Muslims believe in this fact (see Al-A'raf :175). The covenant that man i.e. the self sealed with God in the primordial life, implied that the self is indebted to the Creator. Man i.e. the self pays the debt by way of submitting his desires to God's Will as embodied in the Shariah when man is born into the physical world.

Man in Islam is the highest creation of God because he is bestowed by the Creator the power of intellect ('aql) with which he is able to differentiate right from wrong. At the same time,man is composed of forgetfulness (nisyan) and despite having testified to the truth of the covenant he sealed with God, he forgets (nasiya) to fulfill his duty and his purpose. Forgetfulness is the cause of man's disobedience and this blameworthy nature inclines him towards injustice (zulm) and ignorance (jahl).

Thus, in life (al-dunya) the self is inflicted with disturbances that do not allow it to fully submit to the law of Allah as promised. In this manner, the self is surrounded with impurities that further clouded his/her remembrance of the Al-Mithaq. This impurities caused the self to lose touch with God and lost the sense of the purpose of existence . Here the self will fall in grief (shawqawa). The Quran mentioned this very clearly:

"Verily by the declining day, man is in loss (khusrin), except those who believe and do good works, and exhort one another to truth, exhort one another to endurance" (Al-Asr 1-3)

However, when the self strives hard to free it self from the impurities (i.e. abstaining from God'prohibitions), by way of submitting itself to God's commandment, it will again experience the happiness (saada) it used to enjoy in the primordial stage of life. In this way, it cleansing of the self is achievable when the self struggle through life, enjoining the good and avoiding the bad ('amal ma'afuh nahi mungkar)

Likewise, investments in Shariah stocks is one aspect of man's submission to the Will of God. In wealth creation, a believer is expected to avoid the prohibitions and pursue the alternative means recommended by God. When man is able to pursue wealth creation in this way, he or she will see that justice is put in place. From the moral and ethical angle, man will be at ease with himself/herself. This is the level of nafs muthmainnah (the contented soul) (see figure below).

Conclusion

In explaining the need for purification of stocks listed in the KLSE bourse, this paper looks two factors affecting the investors, namely the legal and ethical factors. The legal factor explains why there is a need to spell out the real nature of 'aqd (contract) of stock trading. If the 'aqad is valid (sah), then the actions of buying and selling stocks will receive God's blessing and therefore rewarded both in this world and the hereafter. If the 'aqd is void (bathil), investors have committed a sin and therefore punishable. This desire to secure Shariah legitimacy (i.e. the legal factor) is driven by the ethical factor, namely the desire to purify one's self by way of obeying the law of God (Shariah). It is an act of submission or enslavement to God as He has given man life and sustenance. The concept of indebtness is fundamental to further understand why Muslims desire to purchase stocks that fully complied with Shariah principles.

Dr. Saiful Azhar Rosly