Is It Permissible To Trade In Preference Shares?
The answer
As opposed to ordinary shares, the majority of the leading Islamic Finance bodies and experts are of the opinion that investing in preference shares is not permissible. This is the view of The International Islamic Fiqh Academy, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Dallah al-Baraka as well as Dubai Islamic Bank.
Fiqh basis
Preference shares normally guarantee shareholders’ capital and promise fixed income. This contradicts principles of Islamic investment.
The GCC Shariah scholars do not approve the practice of preference shares, as opposed to their Malaysian counterparts. A preference share is a hybrid instrument that combines equity and debt in the capital market. It allows its holders to receive a fixed dividend that is not enjoyed by ordinary shareholders. The GCC Shariah scholars are of the opinion that the fixed dividend element contradicts the principles of Islamic commercial law (MF, Res. 63 (7/1) 2010) (Dallah al-Baraka, 2007, p. 373) (AAIOFI, 2010, p. 380) (Dubai Islamic Bank, 2001, p. 681). They hold that the return on investment cannot be fixed as it will be tantamount to riba. In contrast, the Malaysian Shariah scholars have ruled that non-cumulative preference shares are permissible, based on the concept of Tanazul (voluntary waiver of a profit). In this case, during the annual general meeting the ordinary shareholders willingly waive their right to profit so that it can be given to preference-shareholders.
And Allah knows best.
Mufti Faraz Adam
Based on the Hanafi school and on the question as it was asked. Another mufti may reach a different conclusion. Read the disclaimer.