Fatwa: Are preference shares halal?

This is iA the most comprehensive resource for this question on the internet.

We present views from Professor Monzer, then our resident expert Mufti Faraz Adam presents his views, and finally IFG present a commercial perspective on the matter.

View One: Professor Monzer Kahf

Stocks/ shares are basically of two kinds: common and preferred. If the preference in preferred shares in financial such as guaranteed minimum return, priority in payment at time of liquidation and the like, preferred stocks/shares are then prohibited because equal owners of the companies principal must be treated equally. They are forbidden to issue, buy, own and sell. If the preference is managerial they may be permissible. Common stocks are not prohibited from this point of view.

Source: here

Mufti Faraz Adam view

As opposed to ordinary shares, preference shares are not Shariah compliant. This is the view of most Islamic Finance bodies and experts such as the International Islamic Fiqh Academy, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Dallah al-Baraka as well as Dubai Islamic Bank.

If a Muslim investor is receiving preference shares or Muslim-owned company is issuing preference shares, they must first seek to amend these shares to ordinary shares. In scenarios where this is not possible and beyond one’s ability, you are requested to contact a Shariah scholar to assist you in developing a Tanazul (waiver) clause to ensure that the impermissible element is neutralised.

The Fiqh (jurisprudence of the answer):

Preference shareholders are first in line for dividend payments, both when the business is operating, and also in the event of the company entering liquidation in the future. This element goes against the primary Shariah principles of equity investment which dictates that all shareholders should be ranked equally in terms of profit and loss sharing.

Other Sources to Consider

The Status of Preference Shares from Islamic Perspective

The IFG view

Our views on this subject are fully detailed in the below article.

We presently do not ask for preferences shares ourselves when we invest in startups through our angel investor syndicate ifg.vc. However, In the venture capital context we are somewhat sympathetic to the usage of preference shares (within reason and with sensible additional rights) given the high risk nature of the investment for an investor. We are less sympathetic to its usage in other contexts.