A mixed company is one where its core activities are permitted by Shariah, although there are some other activities that may contain a small extent of prohibited elements. For mixed companies, the SAC carries out an analysis with additional considerations before including these companies in the list of Shariah-compliant securities. These considerations are–
(a) the core activities of the company must be activities which are not against the Shariah principles as outlined in the
four primary criteria (that were explained earlier). Furthermore the haram element must be very small compared to
the main activities;
(b) public perception of the image of the company must be good; and
(c) the core activities of the company have importance and maslahah (benefit in general) to the Muslim ummah and the
country, and the haram element is very small and involves matters such as `umum balwa (common plight), `urf
(custom) and the rights of the non-Muslim community which are accepted by Islam.
THE STATUS OF MIXED COMPANIES ACCORDING TO SHARIAH
The Involvement of Muslims in the Purchase of Equity
The existing structure of a company enables its majority shareholders to control it. This means that Muslims can control a company by being the largest shareholders of the company. This is a strategic and important matter that needs to be understood by the Islamic community. At the same time, a question that will possibly arise is that the transfer of the company’s control to Muslims may not necessarily solve the problem of prohibited activities. Sometimes, even though the ownership of the company has changed hands, the prohibited activities still carry on. This depends on the extent of the Muslim community’s observance of the religion’s commandments and prohibitions, and the presence of fasad al-zaman.335
The question of having prohibited activities in a company is not something new. In fact, it has been discussed by contemporary Muslim scholars likeAl-Khayyat. He gives the example for riba, where certain companies arei nvolved in contracts with riba for business transactions conducted by the company’s management. He separates the practice of riba by the company’s management from the company’s main activities. The sins are therefore borne by the company’s management as they are not part of the company’s main activities.336 Nevertheless, the prohibited status of the company is clear if the core activity is prohibited, like riba-based financial services, gambling, production of liquor, etc.
Situation of Mixed Companies
A question arises when a company’s core activity is permissible but at the same time it has other prohibited activities. For example, a big company whose core activity is the production of industrial goods, but has a subsidiary company whose activity involves riba. This activity occurs within the company’s group, and provides loans to the subsidiaries and the holding company as a source of financing for their business activities.
An example of another mixed company is a large company whose core activity is real estate but which has a subsidiary company that operates a hotel or resort where liquor is sold within its premises. What is the status of this company according to Shariah? Is the core activity which is more significant not taken into consideration to permit Muslims to invest in the company? Whereas the permissible activity benefits the public much more compared to the prohibited activity which has minimal benefits.
The form of prohibited activity in the first case is more for financing the company’s purchase of machinery, equipment and others. The form of prohibited activity in the second company is to provide a service to non- Muslims.
Opinions of Past Islamic Jurists
There are some discussions by Islamic jurists in classical works on Islamic jurisprudence which are related to the issue of mixed companies. The discussion looked at the status of companies jointly owned by Muslims and non-Muslims. They touched on a situation where the non-Muslim partners carry out riba-based activities and trading of liquor, which are prohibited for Muslims. Nevertheless, Islam recognises the rights of the non-Muslims. Islam classifies this matter as mal for them.337 Islam has also ruled that its followers cannot damage or violate the assets of the non-Muslim community even when the said assets are prohibited for Muslims. Due to the existence of such a situation, there are different views among past Islamic jurists with regards to permitting the establishment of such a company in Islam.
The next issue also addressed by the Islamic jurists concerns companies owned by Muslim partners but where one partner carries out a prohibited activity, for example, riba. The situation comes about because this partner is not that observant about religious and moral practices. A matter such as this also gives rise to a difference of opinion among the past Islamic jurists because it was related to the principle about a person’s sins not being transferable to another and also the principle of muamalat transactions being generally permissible. It means that we are allowed to practise muamalat among fellow Muslims who may be faithful or fajir338 or between Muslims and non-Muslims or vice-versa.
The past Islamic jurists did not make religion a condition for incorporating a company except when it concerns a mufawadhah company.339
Group of Islamic Jurists That Permit Mixed Companies
Some Islamic jurists believe that it is permissible for Muslims to partner non-Muslims in business, although it is not encouraged. The Islamic jurists were from the Syafi`i Mazhab, and some from the Hanafi, Maliki and Hanbali Mazhab.340 Their arguments were based on qiyas where both partners qualify to become official representatives. Thus they should run the mufawadhah company complying with how the mufawadhah company was formed between the Muslim and non-Muslim. Subsequently, both parties (Muslim and non-Muslim) qualify to carry out the work of the company on their own, even though they both differ on what is permissible and prohibited in carrying out an activity. According to the Islamic jurists, Muslims cannot carry out prohibited activities, such as those connected with riba and liquor trading, while there are no restrictions on the non-Muslims. The same religion need not be present in a mufawadhah company. Islam allows a mufwadhah company to be formed between Majusians and the kitabis (Jews and Christians) although the religions of both parties differ. Majusians worshipped fire and their altar was considered mal, whereas the kitabis did not have the same practice.341
Group of Islamic Jurists That Prohibit Mixed Companies
Imam Hanafi and Muhammad were from among the early generation of the Hanafi Mazhab who did not believe it was permissible for Muslims to collaborate with non-Muslims through mufawadhah. This was because Islamic and non-Islamic activities differ. What was permissible for non-Muslims was considered mal such as liquor and pork, which were prohibited for Muslims.
Rationale Permitting the Inclusion of Mixed Companies in the List of Shariah-compliant Securities
Views of Many Islamic Jurists Permitting
Based on the views of many Islamic jurists,342 the approach towards permitting Muslims to invest in the shares of companies with a mix of permissible and prohibited activities is justified. This is because the esteemed Islamic jurists did not prohibit such companies when evaluating the status of companies jointly owned by both good Muslims and fajir Muslims, even though the companies were later found to carry out prohibited activities, such as riba and the sale of liquor.
Past Islamic jurists also discussed the issue of funding from both permissible and prohibited sources. The majority of the Islamic jurists allowed such transactions involving permissible and prohibited funding, provided the ratio of permissible funds is more.
Izz al-Din bin Abd Al-Salam said:
Meaning: “If the permissible money is more, that is, one dirham of prohibited money is mixed with one thousand of permissible money,then the transaction is allowed.”343
Al-Kasani also said:
Meaning: “Everything will be tainted by what is prohibited, but if the larger part is halal, then trade is allowed.”344
Ibnu Taimiyyah also gave the same view with regards to funds where permissible and prohibited assets are mixed:
Meaning: “Should the permissible be more, then a business transaction will not be judged as prohibited… and should one’s wealth be found to have a mixture of the permissible and prohibited, then the permissible element will not be prohibited; on the contrary, the owner is allowed to take according to the permitted ratio.”345
Islamic Jurisprudence Accepts the Reality of Gharar Yasir and Ghabn Yasir
Gharar346 and ghabn347 are two negative elements that can ruin a contract. However, should it occur in a small amount, Islamic jurisprudence considers it normal and will not adversely affect the contract’s goodwill. In other words, the miniscule presence of these two negative elements in a contract is excusable. The same situation can happen in a mixed company where the permitted activity is more than the prohibited activity. Therefore, the nature of such a company is within the permissible bounds of the Islamic jurisprudence and is excusable.
The Principle of `Umum Balwa
Most of the small prohibited matters in today’s business transactions can be categorised as `umum balwa.348 Such matters, as earlier explained, are included among those matters excusable under Islamic jurisprudence.
The Principle of al-Dharuriyat al-Khamsah
With reference to the masalih dharuriah,349 Syara` has listed hifz al-mal350 as a masalih dharuriah that must be regarded very seriously. The question of the Muslims’ economic strength and integrity is an important factor in the continuity and progress of Muslims. Large companies whose core activity is permissible, should not be cast aside by Muslims just because there is a small number of activities that do not comply with the Shariah requirements. If Muslims are involved in these companies, they can concentrate their capital in permissible activities that outweigh those which are prohibited. Besides, this will benefit Muslims as they can participate in the economy, especially in companies that are important and strategic to them.
Change in Hukm (Ruling) Due to Change in Human Behaviour
Changes in environment and location greatly affect the consistency of rulings through the ages. This is because Islam is a religion that is suitable for meeting human needs at any time and any place. To meet these demands, changes in rulings always take place. Every ruling that is endorsed has a specific aim in meeting the call for justice, obtaining maslahah, and averting damage and destruction. Apart from the factors of time, place and environment, the change in ruling is also related to the changing morality of Muslims. Based on the history of Islamic jurisprudence, there were many rulings that were amended due to changes in time, place and environment. The Islamic jurisprudence states a maxim of Islamic jurisprudence as follows:351
Meaning: “It cannot be denied that a change in ruling is caused by a change in time.”
Even then, changes are confined to rulings that are ijtihadi in nature.
A ruling can change as a result of a lack of abstinence and weak adherence to religious commandments as a whole at a place or what is known as fasad al-zaman. Besides that, a ruling can also change due to changes in the economic system or what is known as asalib iqtisadiyah because if rulings do not change with the times, it ceases to be practical. As a result, the lack of
changes will make the Shariah appear static and obsolete because it cannot cope with the prevailing needs, whereas according to Imam Al-Syatibi, nothing is purposeless in Shariah.352
An example of a change in ruling as a result of a change in environment for Muslims is provided by the ruling concerning the payment for teaching the Quran. The early generation of past Islamic jurists ruled that no payment should be given for teaching the Quran and religion. However, with changing times, such duties were required to be appropriately paid. Without such payment, religious education would be neglected because no one would be interested to teach. As a result, nobody would have a deep knowledge of the Quran and the religion, because specialist knowledge would not be available. Because of this, the Islamic jurists later took the approach of permitting the acceptance of payment, which was originally not permitted, in line with the changing times and environment.353
The reason for deciding on a ruling that differs completely from its original ruling, that is from not permitting to permitting, is so that the religious maslahah will continue to be preserved. If the ruling is not updated in line with the changing times and environment, religious study and its propagation would almost certainly be completely neglected. This contradicts the requirement of the Shariah which wants such noble efforts to continue. Thus, maintaining an old ruling which has no maslahah is contradictory to Shariah principles.
Response to Views Disputing the Permissibility of MixedCompanies
There are parties opposed to the inclusion of a mixed company in the list of Shariah-compliant securities due to its non-compliance with the maxim which means that if the permissible is mixed with the forbidden, then it should be ruled as forbidden. They are of the view that such a mixed company should not be at all included in list of Shariah-compliant securities.
It must be understood, however, that there are strong arguments to rebut the above viewpoint, as follows:
(a) Weakness of the maxim
The authenticity of the above maxim is also disputed. It cannot be denied that this maxim is suitable for certain cases, such as the mixing of slaughtered animals carried out by Muslims and the Majusi but it is not suitable in the case of mixed companies. Al-Sayuti mentions that this maxim is based on a hadith of the Prophet s.a.w.:
Meaning: “Where there is a mix of the permissible and the forbidden, then it becomes forbidden.”
However, Islamic scholars debated on the status of this hadith. According to al-Hafiz Abu Al-Fadhl al-`Iraqi, this hadith is of unknown origin. Meanwhile, al-Subki quoted al-Baihaqi that the hadith was conveyed by Jabir Al-Ja`fiy, someone of weak status who had conveyed it from al-Sya`biy who, in turn, conveyed it from Ibn Mas`ud in the form of a munqati` (hadith of a broken reporting sequence);354
(b) Existence of an opposing maxim
There is an opposing maxim mentioned in Al-Asybah355 at the end of the discussion of the maxim . The maxim concerned is which means: “That which is forbidden does not render forbidden that which is permissible.” This maxim was formulated based on the hadith warid found in Sunan Ibn Majah and Al-Darqutniy conveyed from Ibn Omar; and
Apart from the weakness of the maxim stated above, maslahah is also a strong argument for permitting mixed companies. It is further strengthened by arguments pertaining to the existence of the `umum balwa, fasad al-zaman, `urf, asalib iqtisodiyyah situations and the recognised rights of non-Muslims.
Because of that, the maxim as presented by Izz al-Din `Abd al-Salam356 regarding the mix of good and bad should be applied:
Meaning: “Where there is good and bad together, then it needs to be reviewed…”
If such an action is taken, and hopes of achieving good are more positive, and the disadvantage can be overcome and averted, then such an action should continue. This takes into consideration the command of Allah s.w.t.:
Meaning: “So fear Allah s.w.t. as much as you can…” (Surah al-Taghabun: 16)
On the contrary, if the bad cannot be overcome and the good cannot be obtained because the bad outweighs the good, then the decision not to proceed with the planned action is wiser to avoid the bad.
BASIS FOR ESTABLISHING THE BENCHMARK
To determine the status of a mixed company as a Shariah-compliant company/ securities, it is necessary to draw up specific benchmarks to ensure that prohibited elements are minimal and related to those excused by Syara`. In other words, the presence of prohibited elements does not affect the permissible part which is larger and more important.
The esteemed past Islamic jurists did not draw up a benchmark for determining the status of a mixed company. This, therefore, gives modern Islamic jurists the opportunity to think about such a benchmark.
The SAC considered a number of benchmarks as a basis that can be considered as ihtiyat (precautionary measure) that gives caution in classifying a mixed company under the permissible category as stated by Ibnu Subki in al-Asybah wa al-Naza’ir, that is, “to rule as prohibited something that is a mix of the permissible and the prohibited is ihtiyat and it is not necessarily prohibited.”357
The SAC took into account additional elements like maslahah, `umum balwa, `urf khas min asalib iqtisodiyah,358 fasad al-zaman and huquq ghair muslimin.359 The SAC also looked at numerous fatwa (religious edict from a qualified scholar) which have become exceptions to the maxim which means, if there is a mix of the permissible and the prohibited, then it is ruled as prohibited.
For example, the mixing of slaughtered animals by Muslims and the Majusi is ruled to be totally prohibited.360 This fatwa is in line with the maxim because such a mixed item is prohibited in essence. Whereas if the essence of such an item is not prohibited, but is prohibited for other reasons, then it needs to be scrutinised differently.
Ibnu Qayyim in his Bada’i` al-Fawa’id361 divided the nature of prohibited assets
into two groups:
(a) Prohibited because of its zat (nature), for example liquor, pork, etc. This relates to the case of mixing slaughtered animals mentioned earlier;and
(b) Prohibited due to other reasons, for example, the means by which money is earned is prohibited. Money, in essence is not prohibited, but if money is obtained as a result of theft, robbery, cheating, etc.;
then this money is prohibited. This is similar to the securities of a mixed company, because securities in essence is not prohibited. It becomes prohibited because the activities of such companies produce profits which can be distributed through dividends.
An exceptions to the maxim is, for example, the fatwa concerning silk mixed with common thread. Silk cloth is prohibited to be worn by men as in the hadith of the Prophet s.a.w.:
Meaning: “The Prophet s.a.w. took a piece of silk and placed it on his right. He took some gold and placed it on his left. Then he said: Both these things are prohibited unto men among my followers, but permissible for the women.”362
However, it can be worn by men if the ratio of silk thread mixed with the common thread does not exceed 50%. The benchmark concerning such a mixture is 50%. In other words, if the mixture of silk does not exceed 50%, the cloth may be worn by men. The question is whether such a benchmark is suitable for application in the context of mixed securities. However, from the viewpoint of asset characteristic, both cases are essentially similar, as they appear to be assets that are not prohibited in essence.
Benchmark of One-third
The Prophet s.a.w.’s condition of 1/3 (33.33%) is a very generous limit which can also be considered for use as the benchmark for mixed companies. This statement can be supported by the legacy of Sa`ad Ibn Abi Waqas who wanted to leave his assets as alms as in the following hadith:
Meaning: “One day, the Prophet s.a.w. visited Sa`ad bin Abi Waqaswho was ill. Sa`ad expressed to the Prophet s.a.w. his feelings that his illness was entering the last phase and that death was near. He asked for the Prophet s.a.w.’s opinion on giving his assets away as alms for he had only one daughter to inherit his wealth. Therefore, he wished to give as alms 2/3 of his property. However, the Prophet s.a.w. stated his objections. Then Sa`ad asked whether he could give away 1/2 of his property. The Prophet s.a.w. still said no. The Prophet s.a.w. then said: 1/3 (of Sa`ad’s property to give away as alms) is enough, that too is still too much. Verily, to leave your heir wealthy is far better than to leave you heir impoverished and dependant on other people’s charity.”363
Based on the Prophet s.a.w.’s words, 1/3 or 33.33% “is enough” and can be used as a guideline for the basis of formulating a benchmark. The question is whether this benchmark is suitable to be used for mixed companies, because it relates to the bequest of property and giving of alms. Even so, it cannot be denied that it can be used as a benchmark to set the upper limit of a mixture because an amount exceeding the percentage set will be considered excessive.
Benchmark Based on Ghabn Fahisy
The practice of ghabn fahisy364 in trading is not allowed in Islam. However, if the ghabn is small then it is excused. The meaning of ghabn is making profits which exceeds market price. The theory of ghabn fahisy describes gains which exceed the market price achieved through cheating. If ghabn happens without any act of cheating, then it is permitted.
The activity of tanajusy,365 that is manipulation, if accompanied by the element of ghabn fahisy can give buyers the right to cancel the sale and purchase contract, according to the majority of Islamic jurists from the Maliki, Syafi’i and Hanbali Mazhab.366 This shows that if ghabn fahisy is accompanied by the element of tanajusy, then it is not permissible. However, if it occurs below the benchmark, it is excused. The Hanafi Mazhab ruled that the upper limits for ghabn fahisy are as follows:
(a) 5 per cent for ordinary goods;
(b) 10 per cent for animals, including those used for riding; and
(c) 20 per cent for fixed assets.