{"id":3261,"date":"2021-06-28T12:38:00","date_gmt":"2021-06-28T12:38:00","guid":{"rendered":"https:\/\/blog.ethis.co\/?p=3261"},"modified":"2022-11-15T04:30:16","modified_gmt":"2022-11-15T04:30:16","slug":"short-selling-islamic-perspective","status":"publish","type":"post","link":"https:\/\/ethis.co\/blog\/short-selling-islamic-perspective\/","title":{"rendered":"Short Selling from an Islamic Perspective"},"content":{"rendered":"\n<p><strong>By Abdulazeem Abozaid, Qatar Foundation<\/strong><\/p>\n\n\n\n<p><em>&#8220;Short selling contributes to rendering the stock market a highly speculative market that harms most of those who enter it, even if it is done in an apparently Shariah-compliant fashion&#8221;<\/em><\/p>\n\n\n\n<p>Short selling is among the practices that contribute to the volatility of the stock market and has its high risks. It refers to a sale of shares that the seller does not originally own, but borrows through a broker to return them at a certain time.&nbsp;<\/p>\n\n\n\n<p>The short-selling process can be illustrated as follows: an investor who expects a fall in the future prices of some shares requests his broker to sell 100 of those shares for a certain price. The investor does not own those shares, so the broker borrows them upon the request of the investor, sells them for his account and collects the price. When the time comes for the borrowed shares to be returned, the investor uses the broker to buy similar shares from the market to return them to the lender of the shares. The investor hopes that the shares will be purchased at a lower price as expected, to earn from the difference between the price of the shares that he borrowed and then sold, and the price of shares that he subsequently brought to return to the lender.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_51_1 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\" role=\"button\"><label for=\"item-69ed193aba6ad\" ><span class=\"\"><span style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input aria-label=\"Toggle\" aria-label=\"item-69ed193aba6ad\"  type=\"checkbox\" id=\"item-69ed193aba6ad\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/ethis.co\/blog\/short-selling-islamic-perspective\/#The_Shariah_appraisal_of_Short_Selling\" title=\"The Shariah appraisal of Short Selling&nbsp;\">The Shariah appraisal of Short Selling&nbsp;<\/a><ul class='ez-toc-list-level-5'><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5'><li class='ez-toc-heading-level-5'><ul class='ez-toc-list-level-5'><li class='ez-toc-heading-level-5'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/ethis.co\/blog\/short-selling-islamic-perspective\/#Firstly_Loaning_Shares\" title=\"Firstly, Loaning Shares&nbsp;\">Firstly, Loaning Shares&nbsp;<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/ethis.co\/blog\/short-selling-islamic-perspective\/#Attempts_to_structure_a_Shariah-compliant_short_selling\" title=\"Attempts to structure a Shariah-compliant short selling&nbsp;\">Attempts to structure a Shariah-compliant short selling&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/ethis.co\/blog\/short-selling-islamic-perspective\/#Short_selling_and_its_effect_on_the_stock_market\" title=\"Short selling and its effect on the stock market\">Short selling and its effect on the stock market<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"The_Shariah_appraisal_of_Short_Selling\"><\/span><strong>The Shariah appraisal of Short Selling&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The short-selling mechanism involves different Shariah issues\u2014the most important are: i) soundness of loaning and borrowing shares, and; ii) the commission (interest) paid on the loan.<\/p>\n\n\n\n<h5><span class=\"ez-toc-section\" id=\"Firstly_Loaning_Shares\"><\/span><strong>Firstly, Loaning Shares&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h5>\n\n\n\n<p>Shares are not considered a valid object for a loan because a loan contract entails returning a similar object, and this is not possible in shares because a share represents a common portion of the assets of a company, and company assets are constantly changing. Hence, the borrower is unable to return that which is similar to what he borrowed (AAOIFI Shariah standard No.21 (3\/9) prohibits loaning shares).<\/p>\n\n\n\n<p>Secondly, the commission (interest) paid on the loan Brokers are authorized by some holders of shares to lend them on interest to short sellers. The broker splits the interest with the owner of the loaned shares. When the request for short selling is presented to the broker, the broker acts on behalf of the holders of those shares and loans them to the short seller, which usually requires him to pay 8% interest of the value of the share. The broker usually only pays 2% to the owner of the shares and keeps the rest.&nbsp;<\/p>\n\n\n\n<p>However, the broker is responsible and the guarantor to the owner of the shares for returning them at the appointed time. The broker also benefits from the brokerage fee paid by the short seller upon every sale and purchase of shares. Thus, short selling involves payment of Riba as the loan is repaid with interest, which makes short selling in the way it is practised impermissible (AAOIFI Shariah standard No.21 (3\/6) prohibits short selling given the said considerations).&nbsp;&nbsp;<\/p>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"Attempts_to_structure_a_Shariah-compliant_short_selling\"><\/span><strong>Attempts to structure a Shariah-compliant short selling&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"536\" src=\"https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/271-1024x536.png\" alt=\"\" class=\"wp-image-3262\" srcset=\"https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/271-1024x536.png 1024w, https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/271-300x157.png 300w, https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/271-768x402.png 768w, https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/271.png 1200w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Some attempts have been made to justify the practice of short selling using the concept of \u2018urb\u016bn. \u2018Urb\u016bn specifically refers to the amount of money paid by the buyer to reserve the right of revoking the sale contract. If revoked, the \u2018urb\u016bn amount is forfeited (kept by the seller), but if not, the \u2018urb\u016bn amount is considered as part of the price. \u2018Urb\u016bn was deemed a valid sale contract by the Hanbalis only and not by the remaining schools of Islamic law. Ibn Qudama, Al-Mughni, 6\/331.<\/p>\n\n\n\n<p>As short selling is impermissible given the interest the short seller pays, it has been suggested that by basing it on \u2018urb\u016bn sale the problem can be solved; the short sellers pay \u2018urb\u016bn rather than interest to the broker. To clarify, the short seller buys the shares based on &#8216;urb\u016bn sale and pays the \u2018interest\u2019 as \u2018urb\u016bn. Then he sells the shares, buys similar ones subsequently and returns them to the broker. The original owner of the shares deserves the \u2018urb\u016bn, because according to \u2018urb\u016bn sale&#8217; if the sale item is returned and the buyer does not take it, the seller claims the \u2018urb\u016bn.&nbsp;<\/p>\n\n\n\n<p><strong>However, the invalidity of this structure is obvious from various considerations:<\/strong><\/p>\n\n\n\n<p>&nbsp;The broker is not the owner of the shares such that he can sell them (on \u2018urb\u016bn basis), and he is not authorized to sell them, but to loan them.<\/p>\n\n\n\n<ol start=\"2\"><li>The short seller does not return the same shares, while the \u2018urb\u016bn sale requires that the buyer return the same sold item when exercising his option to return the sold item.<\/li><\/ol>\n\n\n\n<ol start=\"3\"><li>The buyer in \u2018urb\u016bn, by selling the item of sale, (in this case, shares) gives a clear indication of concluding the sale contract. According to \u2018urb\u016bn sale rules, once the contract is concluded, the \u2018urb\u016bn paid is deemed part of the price. In the context of short selling, the short seller would be required to pay the remainder of the price of the bought shares, and not to return the shares later on.<\/li><\/ol>\n\n\n\n<ol start=\"4\"><li>It is not possible in terms of the essence and the aim of urb\u016bn to build short selling on its basis. The aim of \u2018urb\u016bn and its philosophy is to enable the buyer to rescind the deal with compensation if the seller does not consent to give the cancellation option free. In the context of short selling, such an aim does not exist, as it is known that the short seller will conclude the sale. In other words, returning the sale item is not possible with short selling, as it is supposed to be with \u2018urb\u016bn.<\/li><\/ol>\n\n\n\n<h2><span class=\"ez-toc-section\" id=\"Short_selling_and_its_effect_on_the_stock_market\"><\/span><strong>Short selling and its effect on the stock market<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"536\" src=\"https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/281-1024x536.png\" alt=\"\" class=\"wp-image-3264\" srcset=\"https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/281-1024x536.png 1024w, https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/281-300x157.png 300w, https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/281-768x402.png 768w, https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/281.png 1200w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Regardless of the specific Shariah violations that occur in short selling, this type of sale from a maq\u0101sid Shariah (Objectives of Shariah) perspective increases\u2014in terms of effect and result\u2014 the volume of speculation on share prices. This is because it enables a significant number of speculators to enter the market and speculate on shares without being actual investors or owners of the shares that they trade.&nbsp;<\/p>\n\n\n\n<p>The philosophy of short selling is based upon market price speculation, forecasts and expectations. A large amount of speculation on shares leads to volatility in market value, which leads to grave and rapid harm to some investors at the expense of others. This is the nature of gambling activities, and that is why the market regulating authorities seek to restrict such activities to reduce their harmful effects.&nbsp;<\/p>\n\n\n\n<p>However, at its essence, this sale leads to the aforementioned caution and no restrictions can be placed to prevent it. Most of the harm accrues to the short sellers themselves because they sell what they do not have. If their expectations turn out to be wrong, which is very probable given the factors discussed earlier, they incur debts that could lead them to bankruptcy or selling-off their personal properties.&nbsp;<\/p>\n\n\n\n<p>In the final analysis, short selling contributes to rendering the stock market a highly speculative market that harms most of those who enter it, even if it is done in an apparently Shariah-compliant fashion. Hence, when passing a Shariah ruling on the legitimacy of short selling or attempting to Islamize it, it is necessary to assess the overall reality of this matter from a macro Shariah perspective before looking into its detailed Shariah issues.\u00a0<\/p>\n\n\n\n<p>Read more about <a href=\"https:\/\/ethis.co\/blog\/islamic-investing-al-bay-crowdfunding\/\" target=\"_blank\" rel=\"noreferrer noopener\">Islamic Investing<\/a><\/p>\n<div class=\"rns\" data-title=\"Short Selling from an Islamic Perspective\" data-tags=\"\" data-categories=\"The Halal Journal\" data-comments=\"0\" data-date=\"1624883880000\" data-author=\"Anis Shakirah\" data-single=\"\" data-url=\"https:\/\/ethis.co\/blog\/short-selling-islamic-perspective\/\"><\/div> <!-- Check out https:\/\/reactandshare.com -->","protected":false},"excerpt":{"rendered":"<p>By Abdulazeem Abozaid, Qatar Foundation &#8220;Short selling contributes to rendering the stock market a highly speculative market that harms most of those who enter it, &hellip; <span class=\"read-more-link\"><a class=\"read-more\" href=\"https:\/\/ethis.co\/blog\/short-selling-islamic-perspective\/\">Read More &rsaquo;<\/a><\/span><\/p>\n","protected":false},"author":58,"featured_media":3265,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":""},"categories":[2013],"tags":[],"aioseo_notices":[],"jetpack_featured_media_url":"https:\/\/ethis.co\/blog\/wp-content\/uploads\/2021\/06\/Short-Selling-from-an-Islamic-Perspective.png","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/pbDwgm-QB","_links":{"self":[{"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/posts\/3261"}],"collection":[{"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/users\/58"}],"replies":[{"embeddable":true,"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/comments?post=3261"}],"version-history":[{"count":1,"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/posts\/3261\/revisions"}],"predecessor-version":[{"id":6578,"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/posts\/3261\/revisions\/6578"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/media\/3265"}],"wp:attachment":[{"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/media?parent=3261"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/categories?post=3261"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ethis.co\/blog\/wp-json\/wp\/v2\/tags?post=3261"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}