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Why short-selling is Haram

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Points of Essence:

  • Islamic finance prohibits short selling as it flouts the ban on unjust enrichment by one party at the misery of others which may cause havoc to the entire economy system. The temporary ban imposed in the light of the recent financial crisis manifests the adoption of principle that Islamic finance advocates.

Amid the financial crisis, the US stock market regulator SEC banned short selling on September 24, but it aims to lift this ban on Thursday, October 9. In Islamic Finance, however, ‘to go short’ will always be Haram.

Traders at the Dubai Financial Market react to the turmoil on the global exchanges

Traders at the Dubai Financial Market react to the turmoil on the global exchanges

In order to protect the stock markets from sliding further the Securities and Exchange Commission (SEC) saw no way out other than banning short-selling.

After the enactment of a $700bn rescue package for Wall Street, the SEC, however, announced that the ban would be lifted on Wednesday, at 23.59.

Short selling occurs when stock market participants sell stocks or commodities they do not own in order to profit later from an anticipated fall in prices. It is a strategy widely used by hedge funds, which often are blamed for contributing to the fall of market instruments.

Shariah against short-selling

Because of the latter phenomenon, short selling is considered as haram under Shariah.

‘In Islamic Finance, we deny the conventional way of thinking, which aims of creating a new dollar out of every dollar’, says renowned Pakistani Shariah scholar Sheikh Dr. Taqi Usmani. By selling a stock short, the ‘investor’ may gain while the underlying company loses value – a clear violation of the ban of unjust deeds, stated in the Holy Quran, Sure Al Baqara, 2, 278 – 279: ‘Deal not unjustly, and ye shall not be dealt unjustly’.

Islamic Finance is about serving society. By selling a stock short, an avalanche of more short-sellers might be triggered, leading the firm to expensive stock buy-back initiatives or in the worst case to bankruptcy.

As well as short selling, day trading is labelled as speculation and therefore is counted as haram as well. Market participants are certainly allowed to profit, but this should add value to the entire economic system.

Shariah banking’s moral stance

The aspect of Tauhid, or unity, is also core in Islamic Finance. It is not only about investing in ‘pure’ stocks or avoiding interest. It is about protecting society from trickery, fraud and social tensions. Furthermore, Shariah banking bans sector which allegedly hurt Muslim society and family values as well.

Sectors which are unacceptable or haram under Islamic Law (Shariah) are well-known. An Islamic Fund manager is not allowed to invest in stocks pertaining to alcohol, tobacco, pornography, entertainment, defense and the conventional banking and insurance sector.

With the temporary ban of short-selling, Western financial regulators adapted for the first time a core principle of Islamic Finance. Will they now look at the Quran more closely in order to avoid another Black Monday?

Remember, most Islamic Banks in the GCC have so far achieved double-digit gains in 2008 while conventional banks currently recount their biggest losses in history.



Written by Suapi Shaffaii

October 8, 2008 at 9:58 pm

One Response

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  1. In the context of this turmoil of global stock exchanges, there are number of lessons to learn for both Islamic and Conventioanl finance. Conventional finance should provide more attention to Islamic principles and Islamic finance should have to stop mocking of each and evey convetional products.

    Nabeel Kattakath

    October 9, 2008 at 12:57 pm

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