Shariah-compliant Investment and Debt

Recently, I came across a Facebook ad on what makes Shariah-compliant Investment different.

One of the points mentioned is “No debt or interest payments in the investment structure.”

This is a laughable claim as it reflects ignorance of the Facebook page.

Anyone who has been involved in Islamic finance would and should know of Debt to Equity ratio.

1- Debt to equity ratio: The problem with debt in the capital structure of a company, from an Islamic point of view is that it is interest based. A company indebted through Murabaha, for instance, need not have any such restriction. Borrowing on interest is not permitted, therefore it is necessary that such borrowing is limited to a tolerable level. In certain situations Shari’ah treats minute and insignificant amount of non permissibles as negligible having no effect on the permissibility. But what is the cut off-point? There are many indications in Shari’ah which points out to the “one third” as “plenty”, and that anything less than one third is “trifle”. Though such distinction came in a different context, many contemporary Shari’ah scholars thought it relevant and assumed that a debt to equity ratio of less than 1/3 is tolerable. It is extremely important to note that such. criteria will never be suitable for wine production for example. This because, as we mentioned above, hardly any company can do without some debt. Our objective here is, therefore, to measure the extent of the firms financing with debt. Debt to equity ratio represent the relationship between funds supplied by creditors (debt) and investors (equity).

Time and time again, we would find people who claim “Shariah-compliant” in promoting their financial or investment planning services, yet they do not know their stuff.

While I personally do not restrict myself to “Shariah-compliant” financial planning and advisory, and preferring what I would call a “practical financial planning for Muslims” approach (I shall write on this in a post soon, Insha Allah), occasionally I would find myself having to call out such claims of “Shariah-compliance” and exposing the claimant’s ignorance of his own field as a financial practitioner or even as someone who claims to do “Shariah-compliant” financial planning and advisory.

As mentioned in my introduction to this blog, I will be writing on a series called “Dispelling myths of Riba” from my perspective as a financial planner and a Shariah student.

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