Islamic Capital Markets and Products

CHAPTER 7Shari'ah Foundations of Islamic Equity Investment Criteria and Purification of Investments

By Mohamed A. Elgari

Islam is a religion that governs the life of Muslims in totality. Islamic law which is called Shari'ah in Arabic, governs both one's relationship with God and with one's fellow man. Shari'ah is a very rich and amply detailed legal system. One of the most distinct phenomena in the Muslim world today is that Muslims are keener to adjust all aspects of their life to the commands of Shari'ah. This includes economy and finance. Islamic equity investment criteria came as a response to this trend.

The basic concept of the modern corporation has never been rejected by contemporary Shari'ah scholars since it was introduced in the Muslim world less than 100 years ago. They saw in it a modern form of a well-known Shari'ah acceptable form of partnership called ‘Anan partnership’.¹

However, the model company upon which all jurisprudent probing was based is one that is free of every prohibited activity, including borrowing on the basis of interest. A company with such purity does not exist today even in Muslim countries. In fact, almost all major business enterprises resort to borrowing if only to manage cash flow. This means that the contemporary form of a company is a far cry from the original model upon which Shari'ah scholars based their judgement.

Only in the wake of colonisation, when Muslim countries witnessed a movement to assert their Islamic identity, did the ...