Many questions are raised about private pensions and their permissibility. A detailed analysis will be released as part of our Islamic finance think tank, Islamative Finance. For now, a brief summary is provided below.
It should be known that no scholar permits contributions to a pension scheme unconditionally. They all impose certain conditions that must be met for any pension to be considered ḥalāl. Some scholars wrongly assume that all pensions are a type of loan. This understanding is inaccurate since there are different types of pensions, especially in the UK.
Defined Contribution Pensions
Defined contribution pensions are the most common type, particularly in the private sector. This type of pension is an investment, not a loan. The amount contributed is invested into various funds selected by the contributor and then pooled with other people’s pension contributions.
You authorise the pension fund to invest your money on your behalf, and they hold it in a trust for you. This means they are your agent (wakīl) for investing your money. The amount you receive after retirement is based on the performance of these investments. Islamically, this structure aligns with an investment, not a loan.
Since the pension provider acts as your agent for investing on your behalf, the types of investments they select are important in determining whether the pension is ḥalāl. In most defined contribution pensions, contributors can choose their investment type, usually from a range of funds that invest in stocks and shares. Therefore, the ruling on investing in such a pension depends on the permissibility of investing in stocks and shares.
Investing in Stock & Shares
Many scholars take the position that investing in certain stocks and shares under specific conditions is permissible. These conditions typically include:
- The company’s core business must be ḥalāl and not prohibited.
- The total interest-based debt (ribā) must be less than 33% of the total assets.
- Income from ḥarām sources must not exceed 5%.
Based on this view, if a pension fund invests in stocks that meet these conditions, contributing to such a pension is permissible. Usually, pension providers offer investment options labelled as ‘ḥalāl,’ ‘Sharīʿah-Compliant,’ or ‘Islamic,’ which claim to fulfil these conditions.
However, these criteria are arbitrary and not based on any sound evidence but rather on the independent judgment of certain scholars and concepts such as necessity (ḍarūrah). Even those who uphold these criteria acknowledge the major issue of ribā (usury) and the difficulty of avoiding it in such investments. However, they justify it by applying arbitrary conditions.
The Position of Ahl al-Sunnah Scholars
The scholars of Ahl al-Sunnah across the subcontinent do not accept these conditions and criteria. They unanimously prohibit investment in any type of stock in a public company due to the heavy involvement of ribā.
The conditions laid out by others, which supposedly make a stock ḥalāl, are purely arbitrary and have no real justification. For instance, the 33% debt-to-asset ratio is an arbitrary threshold not supported by any strong fiqh position.
The reason such criteria were developed by these scholars is due to the impossibility of finding large companies that avoid debt and interest in the modern world. However, this does not justify the creation of arbitrary rules, as necessity (ḍarūrah) only applies when something is impossible or extremely difficult to avoid. In contrast, these investments can be avoided and are not essential.
Ironically, the very scholars who permit investing in shares of public companies despite the issue of ribā strictly prohibit conventional interest-based banking and mortgages. They reject necessity-based arguments in those cases yet fail to apply the same level of rigour when it comes to the issue of ribā in stocks and shares.
Arguments of necessity apply in cases such as the use of fiat currency. Despite being inherently ribā-based, fiat currency is permitted because avoiding it is impossible in today’s world. However, necessity cannot be used to justify investing in ribā-based companies, as such investments are voluntary and avoidable. The argument for using maqāṣid al-sharīʿah (higher objectives of Islamic law) to justify investing in public companies is flawed.
If investing in public companies and becoming a shareholder is permissible under this reasoning, then logically, a person should also be allowed to invest in a real estate investment company started by friends who use interest-based debt financing to purchase investment properties while maintaining a debt-to-asset ratio below 33%.
However, such a business model is not permitted, yet investing in companies that follow the same practice is. There is no real difference between this example and investing in public companies that heavily deal in ribā.
Under this widely accepted yet flawed position, you cannot directly run a business with ribā-based debts (even below the 33% threshold), but you can invest in a public company that does. How does this make sense? What is the actual difference between these cases?
Thus, this mainstream position is simply a way to justify dealing in ribā. It cannot be considered acceptable, even if it has become the norm in modern Islamic finance.
The scholars of Ahl al-Sunnah across the subcontinent unanimously oppose investment in stocks and shares due to the inability to avoid ribā. This is the unanimous position of the scholars of Ashrafiyyah, Bareilly, and Darul Ifta AhleSunnat of Dawat-e-Islami. I am not aware of any scholars of the Ahl al-Sunnah from the subcontinent who permit investment in stocks, with or without conditions (See Majlis e Shar’ī Ke Faisle 1/144 presided over by senior scholars including Muftī Sharīf al-Haq, Muftī Akhtar Ridā; Share Bāzār Ke Masāyil by Muftī Nizāmuddīn Misbāhī; Jadīd Masāyil Par Ulemā Kī Rāye Aur Faisle 1/175).
With this in mind, investing in a defined contribution pension that includes stocks and shares—whether labelled “Islamic” or not—would be outright prohibited.
The only possible option for a defined contribution pension is if an Islamic real estate fund is available instead of conventional stocks and shares. If such an option exists, its permissibility would depend on its structure and setup.
On a separate note, Indo-Pak scholars are generally unaware of the different categories of pensions and how they function in practice. Their understanding is often closer to a defined benefit pension rather than a defined contribution pension. This impression is based on discussions with senior Muftis, who have expressed their lack of knowledge regarding defined contribution pensions that invest in stocks and shares.
Caution in Financial Matters
Muslims must be cautious with their wealth and investments. The Messenger of Allāh ﷺ warned of a time when a person will no longer care whether his earnings are from lawful or unlawful sources (Ṣaḥīḥ al-Bukhārī, 2083). Imām al-Bukhārī included this ḥadīth under the chapter discussing the Qur’ānic verse concerning ribā.
This is merely a summary. A more detailed analysis, along with a video essay, will be published soon under our new think tank, Islamative Finance.
With regard to a defined benefit pension, this will be addressed in a separate note—in shāʾ Allāh.
Muhammad Kalim Misbahi
