Q: Can you
suggest any other literature regarding the propriety of
granting stock options in a company to Muslim employees? Are
Muslims able to participate in employee stock option plans?
If not, what other options are available in lieu of
partcipating in employee stock option plans?
A: Thank you
for your question. This is one which many Muslims puzzle over,
and with good reason. To begin with, the term "options" often
leads to confusion because most Muslims recognize it as
perhaps having to do with the options market; and the buying
and sellings of options is clearly prohibited owing to the
element of uncertainty, or gharar, at the time of contracting.
(For a detailed discussion of gharar, see: "Lesson
Two, Riba and Gharar", of the course I teach at the Dow
Jones University, "The Principles of Islamic Investing"
available on the internet beginning in March 2000 at
people may have questions about the way a typical corporate
stock option actually works. With a little help from the
webmaster, I'll outline the general idea below:
In order to
reward performance, or to motivate employees to work harder,
the company will offer an employee the option of 100 shares at
a set price (strike price) which is usually not the same as
the market price. Generally, the offer will be valid for a
certain period of time (exercise period), a number of years or
a number of days from the time an employee leaves the company.
Do nothing -
the employee pays nothing and receives nothing.
option by buying the shares and selling them at market
value, gaining the difference, less commissions, in cash.
shares at the strike price, and keep them for the future.
of the shares at market price to and keep the rest of the
shares for the future.
circumstances, the "option" is actually an offer, because the
price is fixed. The word "option" refers to the fact that the
company has given its employee a choice, or choices, either to
buy the stock and hold it, or to sell it, or a combination of
the two. Under these circumstances there is nothing wrong with
an employee opting to buy the stock... but only on condition
that the company is Shari`ah compliant or, in other words,
satisfies certain financial criteria. Chief among these
criteria is that the company must be engaged in a primary
business that is halal... companies engaged in riba
as their primary business, like most companies in the
financial sector, are definitely out of bounds for Muslim
investors. The same is true of companies that produce or sell
alcohol, tobacco, pork products, so-called "adult
entertainment", and so on. So a Muslim investor must be
careful about where his/her investment funds are placed. There
are also secondary considerations, some of which are concerned
with the extent to which a company is involved in riba,
through corporate borrowing, or non-operating interest income,
and some of which are concerned with accounts recievable.
These are refered to as secondary Shari`ah screens; and the
Shari`ah Supervisory Boards (SSB) of most Islamic funds
have given opinions regarding these screens. Many Islamic
funds have adopted the criteria set by the SSB of the
Dow Jones Islamic Market Index; because those
screens are the most stringent and also the most closely and
short answer to the question of whether or not Muslims may
exercise stock options when these are offered to them by the
companies they work for is yes. And the reason that this is
lawful is that the "option" is actually an offer; when the
essential elements of any sale are an offer (ijab) and
its acceptance (qabul).
There were two
other parts to your question. One had to do with literature on
the subject. I can recommend the book by Justice Muhamad
Taqiy Usmani, entitled Islamic Finance. The last
part of the question, concerning what other options are
available in lieu of partcipating in employee stock option
plans, is unclear to me. Obviously, a lot of options are open
to both employees and management. But what is sought is not
clear from the question.
this, as in all other matters, Allah knows best.