Investing in commodities

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Question:

Assalam o Alaikum,
Question : Is investment in commodities such as crude oil or currency allowed? Can u please provide the reasoning for better understanding

Jazak Allah

 

Answer:

وعليكم السلام ورحمة الله وبركاته

_Jazakallah Khair_ for the query. May Allah _Ta’ala_ accept your sincere intentions.

Commodity trading could take a few different forms. Generally on the commodity market exposure is achieved through CFD’s ( Contract of Difference) Futures & Forwards and Swaps. CFD’s are non-compliant since the subject matter traded is not recognised as tradable in Shari’ah as it does not constitute an asset. Forwards & Futures and Swaps ( and other binary options) have elements of deceit ( _gharar_), usury ( _ribā_) and gambling ( _maysir_) and include other irregularities such as short term selling and non-ownership.

ETF’s ( exchange traded funds) and ETC’s( exchange traded commodities ) could be compliant but must undergo a shariah compliance screening process to ensure ownership and other potential irregularities like being non-future based.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia standards for Islamic financial institutions and the industry.

There is tiered screening process developed and endorsed by the above Islamic Finance body’s Scholars that include screening traded companies for primary and secondary business activities, debt and market caps and liquidity ratios after which compliancy rating are given by independent ratings agencies.

Thus in order to answer the question more comprehensively, as a beginning point, more detail will be required on the exact nature of the commodity that you intend to invest in in order to determine its compliance status.

In the current COVID environment where there is an increased interest in online trading, it is recommended that we verify the shariah compliance of the stocks/ commodities before embarking on such trading.

There is a misconception that a simple screening of the primary business activity is sufficient to determine the traderbility of a stock – without giving consideration to other potential factors which could render it non- shariah complaint.

And Allah Ta’ala knows best.

Answered by Shaykh:

Shaykh Shabir Moosa

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