I saw some discussion on the internet regarding the use of the short sell in Saudi Arabia. Since the Aramco stock has been falling in price, Saudi traders are wondering if they can use this technique, which is frequently used by hedge funds. Here is how I see it.
Without getting into much of the financial jargon, the process of selling short kinda goes like this:
- Borrow some stock from a broker
- Sell that stock at a high price
- Wait for the stock to drop in price
- Buy that stock at the low price
- Return the stock to the broker
- Make a profit
The internet is saying that Islamic law does not allow you to sell something that you do not own; thus, the short sell is not allowed. I am not sure that is the whole of it. Selling short usually requires that interest is charged on the loan of the stock by the broker. Charging interest is a problem for Islam.
Believe it or not, charging interest has been a problem to most people around the world for most of history. It was even frowned upon by Christian Europe. Great thinkers like Aristotle were very much against it. One of the main reasons why, I believe, is because if you miss an interest payment, that interest has a tricky way of getting rolled into the principle. That is now charging interest on the interest. Ha Ha Ha. People wonder why inflation is always rising, even during a recession.
That does not mean that banking did not exist in the Old World. In Europe, a set fee was charged instead of interest. In Islamic banking, loans are seen as an investment and the bank is eligible to receive some of the profits for which the loan was used. Thus, there is no interest on the interest. I think the short sell is possible in Saudi Arabia if the interest charged were replaced with a set fee or shared profits.
I wanted to comment on the issue because the West usually gets things like this wrong as concerns Islam. For instance, westerners believe that Islam allows multiple wives. Islam actually does not. Firstly, from what I know, any Muslim man that marries another wife must treat each wife equally, that includes financially. And secondly, the first wife must agree to the second marriage. Does anyone really believe these things will actually happen? I think that Islam is saying, in a subtle and poetic way, that having multiple wives is actually not allowed because it is impossible to satisfy the requirements.
Furthermore, the West seems to be under the impression that Islam spreads the faith by the sword. That is also not true. Islam saw its greatest expansion through the use of trade. The Islamic people have always been good at astronomy, sailing, navigation, and business. While Europe was floundering in the Dark Ages, Arabs were making money through trade, particularly in India. The Indian sub-continent has one of the highest Islamic populations in the world.