upon maturity. Investing in Certificates of Deposition is
impermissible because thegains of the investment are earned from
interest.
Stocks
A Stock, Share, or Equity , is a type of security that signifies
ownership in a corporation and represents a claim on part of the
corporation's assets and earnings. There are two main types of stock:
common and preferred. Common stock usually gives the shareholder
voting rights and allows them to receive dividends declared by the
company. Preferred stock generally does not have voting rights, but
has a higher claim on assets and earnings than the common shares. For
example, owners of preferred stock are given priority over owners of
common stock in the event of bankruptcy
It is permissible to invest in common stocks as long as the company
one is investing is in compliance with the following conditions (as
highlighted below by Justice Mufti Taqi Uthmani, a renownedand
respected scholar in the field of finance and economics):
1. The main business of the company is not in violation of Shari�a.
Therefore, it is not permissible to acquire the shares of the
companies providing financial services on interest, like conventional
banks, insurance companies, or the companies involved insome other
business not approved by the Sharī�a, such as the companies
manufacturing, selling or offering liquors, pork, harām meat, or
involved in gambling, night club activities, pornography etc.
2. If the main business of the companies is halāl, likeautomobiles,
textile, etc. but they deposit there surplus amounts in a
interest-bearing account or borrow money on interest, the share holder
must express his disapproval against such dealings, preferably by
raising his voice against such activities in the annual general
meeting ofthe company.
3. If some income from interest-bearing accounts is included in the
income of the company, the proportion of such incomein the dividend
paid to theshare-holder must be given charity, and must not be
retained by him. For example, if 5% of the whole income of a company
has come out of interest-bearing deposits, 5% of the dividend must be
given in charity.
4. The shares of a company are negotiable only if the company owns
some non-liquid assets. If all the assets of a company are in liquid
form, i.e. in the form of money that cannot be purchased or sold,
except on par value, because in this case the share represents money
only and the money cannot be traded in except at par. [Please visit
http://albalagh.net/Islamic_economics/finance.shtml for complete fatwa
and explanations]
Now that we understand the independent rulings ofthe securities
mentioned above, we are given a better picture of what types of 401k
plans wouldbe lawful and unlawful to invest in. Based on what we have
examined it is therefore permissible to invest in a 401K plan as long
as the mutual fund selected is in compliance with the Sharī�a.
The problem that arises atthis point is that the majority of the funds
offered by companies for this plan do not include Islamic funds (such
as the Dow Jones Islamic Fund) or even ethical funds, (which are not
necessarily lawful since they may not meet all the requirements to be
in compliance with the Sharī�a). Nevertheless, if a Sharī�a compliant
fundis offered then it would bepermissible to invest in it as part of
one�s 401k plan.In this regard any amount matched or contributed
byone�s employer toward the 401K plan is also permissible.
Existing Investments in non-lawful 401k plans
As for 401K investments already held in an unlawful mutual fund,
oneshould opt to switch his orher holdings out of the existing fund
and reallocate the money into a Shari�a compliant Fund . In the case
where one�s company does not includeany lawful mutual funds then one
may be able to make such a request, like including the Dow Jones
Islamic Funds as an option. If this is not a possibility then it would
be necessary to withdraw the funds from one�s plan and either transfer
over (roll over) to another lawful plan (such as a brokerage IRA
consisting of lawful stocks) or consider other investing venues, even
though therewill be a penalty for an early withdrawal. Whatever money
is received by the person in this case, only the original capital
amount invested by the person and that which has been added by one�s
company will be permissible for one to retain. All excess will have to
be disposed off to the poor without intention forreward.
Zakāt on 401k plans
Given that one cannot withdraw from 401K plansuntil one is 59.5 years
old without facing a penalty, the question comes up as to how and when
zakāt needs to be paid on this. :->
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