Lecture 5 · Securities
01 Securities and their two types
Built from the slides
This sheet follows the wording of the Lecture 5–9 slides. Midterm 2
covers Lectures 5–9, including Lecture 9 (Murabaha).
"A security is a financial instrument that represents an ownership
position or a credit, issued by companies or governments in forms of
shares or bonds that can be traded in the stock market 'bourse'."Securities — الأوراق المالية
T
Title deeds — shares
Equal parts of a company's capital. Owning one means owning part of
the company, with shareholder rights such as voting and dividends.
An equity interest.
D
Debt deeds — bonds
A promise from a bank or company to pay a fixed amount on a set date
in exchange for interest — usually because the company needs a loan
to expand. A loan, not ownership.
Mnemonic — "Shares own, Bonds owe"
A share is a title (you own a slice). A bond is a
debt (the company owes you).
Lecture 5 · Markets
02 From a regular market to the Bourse
Regular marketA place or system where buyers and sellers meet to exchange goods,
services, or financial instruments. Because they deal freely, the
price of the same good evens out across the market quickly.
Stock exchangeA marketplace where securities (stocks and bonds) are bought and
sold by brokers (for a client) and
dealers (for their own accounts). It enables price
discovery and liquidity and sets rules for fair trading.
Where the word "Bourse" comes from
| Fact | Detail |
|---|---|
| Origin | A 13th-century inn in Bruges, Belgium — Huis Ter Beurze |
| Founder & year | Robert van der Buerze, 1285 |
| How it grew | Its managers gave traders financial advice → the "Beurze Purse" → a hub only for trading commodities |
| Spread | The Paris Bourse (18th century) drove modern stock markets across Europe |
| Examples today | NYSE (New York), LSE (London) |
Four things traded on a stock exchange
S
Stocks
Ownership in a company.
B
Bonds
Debt from governments or corporations.
C
Commodities
Gold, oil, crops — through futures contracts.
F
Foreign exchange
Currencies — usually a separate market.
Mnemonic — S.B.C.F.
"Stock Brokers Count Francs."
Common mistake
Brokers and dealers get swapped. A broker trades for
a client; a dealer trades for
their own account. Seats used to be bought for membership;
today trading is mostly electronic.
Lecture 5 · Differences
03 Regular market vs. stock market
| # | Regular market | Stock market (Bourse) |
|---|---|---|
| 1 | Seller meets the buyer face to face | Deals are sometimes done through brokers and mediators |
| 2 | Goods are present in front of the dealers | Goods are elsewhere (in stores or private banks) |
| 3 | Delivery and pricing happen after the buyer checks the goods | Not so — the buyer does not inspect first |
| 4 | Buying and selling are real | Can be speculation on price differences without paying the price or delivering the goods |
Mnemonic — M.P.C.R.
Meeting, Presence,
Checking, Reality — the four things
a regular market has and the Bourse may lack.
Lecture 6 · Shares
04 Shares — definition and four characteristics
"Shares are deeds representing units of ownership in a company's
capital. Each share has an equal value, cannot be split up, can be
traded on the market, and proves ownership rights as a shareholder in
that business."Definition of shares
Ownership can be public (traded on stock exchanges) or private (not publicly traded).
E
Equal in value
The capital is divided into equal parts.
I
Indivisible
If several people share one share, only one represents them before
the company.
T
Tradable
Can be sold, bought, or traded.
N
Nominal value
A stated value in the deed, set by law with a maximum or minimum.
Mnemonic — E.I.T.N.
"Every Investor Trades Nominally." Bonds have the
same four characteristics — see block 10.
Lecture 6 · Values
05 The four values of a share
| Value | What it is | Does it change? |
|---|---|---|
| Nominal (par) | The face value printed on the deed — the legal minimum issue price (e.g. $1 or $10) | Fixed |
| Issue | The price shares are offered at in an IPO or a new issue | Set at issue |
| Real | Assets minus liabilities, per share | Moves with the company's profitability |
| Market | The current trading price on the exchange | Moves with supply and demand, speculation, politics and the economy |
Mnemonic — N.I.R.M.
Printed → Offered → Earned → Traded: Nominal, Issue,
Real, Market.
Common mistake
Real value comes from the company's books (assets
minus liabilities). Market value comes from
the exchange (supply and demand). Don't mix them.
Lecture 6 · First classification
06 By rights — ordinary vs. preferred shares
1 — Ordinary shares: equal value, equal rights
1
Remain
Can't be expelled or have shares taken without consent.
2
Vote
One vote per share in the general assembly.
3
Dividends
A share of the distributed profits.
4
Dispose
Sell, gift, or otherwise transfer the shares.
5
Monitor
Review the balance sheet and financial records.
6
Sue
File a liability lawsuit against the board for its errors.
7
Priority
First right to subscribe when new shares are issued.
8
Recoup
A share of what's left of the assets on liquidation.
Mnemonic — a shareholder's life
You stay, you vote, you
earn, you sell, you
watch, you sue, you
buy first, and at the end you
collect.
2 — Preferred shares: special rights to attract subscribers
a
Fixed profit
Paid whether the company profits or loses.
b
Full recoup
The whole share value back on liquidation.
c
Extra votes
More than one vote in the general assembly.
Ruling — Not permissible to issue
1. A fixed profit regardless of profit or loss is
riba.2. Treating shareholders unequally contradicts the justice Islam requires.
Mnemonic — "Riba and Rank"
Preferred shares fail twice: guaranteed profit (riba) and unequal rank
(injustice).
Lecture 6 · Second classification
07 By recouping — capital vs. enjoyment shares
| Capital shares | Enjoyment shares | |
|---|---|---|
| Nominal value returned early? | No — not while the company operates (it would shrink the capital) | Yes — paid back gradually before the company closes ("shares consumption") |
| Includes | Both preferred and common shares | Companies that use up their assets, e.g. petroleum drilling |
| How repaid | — | Annually and gradually, by lottery |
| Ruling | Permissible | Not permissible |
Why enjoyment shares are prohibited
After recovering their money the holder is no longer a partner in the
capital or the work, so any profit they still take is
illegitimate money — consuming one another's wealth
unjustly. The lottery adds manipulation and
gharar (uncertainty).
Common mistake
"Enjoyment" sounds harmless. Remember it as "enjoying profit after
you've already left" — that's why it's forbidden.
Lecture 6 · Third classification
08 By nature — in-kind vs. cash shares
K
In-kind shares (الأسهم العينية)
Issued for non-cash assets — property, equipment, intellectual
property, any tangible or intangible asset.
C
Cash shares (الأسهم النقدية)
Bought with cash — the most common way companies issue shares.
The three classifications — R.R.N.
By Rights (ordinary / preferred), by
Recouping (capital / enjoyment), by
Nature (in-kind / cash).
Lecture 6 · Rulings
09 Ruling of dealing in shares, trading and zakat
Dealing in shares is permissible on five conditions
1
Halal activity
No alcohol, no usurious banks. Buying such shares is partnering in
sin and transgression.
2
No riba
The company doesn't deal in usury, even in some transactions.
3
Known company
Transparent, with clear integrity and finances.
4
Not preferred
Fixed profit = riba; unequal treatment = injustice.
5
Not enjoyment
Profit after recovering capital = unjust wealth + gharar.
Mnemonic — H.R.K. + no P, no E
Halal, Riba-free, Known — and never Preferred or Enjoyment.
Trading and circulating shares
| Rule | Ruling |
|---|---|
| Buying shares with an interest-bearing loan | Prohibited |
| Short selling (selling shares you don't own yet) | Prohibited |
| Selling, transferring, or using shares as mortgage collateral | Permissible — fully negotiable |
| Paying for shares in installments | Permissible |
Zakat on shares
| Shareholder | Zakat |
|---|---|
| Long-term investor (holds for dividends) | None due from them directly, if the company pays zakat on their behalf (as in Saudi Arabia) |
| Speculator / active trader | Value the whole portfolio at market price at the end of the lunar year and pay zakat on it |
Lecture 7 · Bonds
10 Bonds — definition and their names
"Bonds are transferable deeds issued by companies or governments which
represent long-term loans, for incremental financial revenue. Usually,
they are allocated by public subscription."Bonds (debentures)
Characteristics — E.I.T.N. again
Equal in value, Indivisible against the company, Transferable, Nominal
value — the same four as shares.
Terms used for bonds
| Name | Key facts |
|---|---|
| 1 — Investment certificates |
a. Increasing nature — money stays with the
bank up to ten years, principal + interest paid at the end. b. Current yield — a fixed annual interest. c. Increasing value with lottery draws — interest plus prize draws (sold as "encouraging saving"). |
| 2 — Treasury bills | Short-term government bonds, usually three months, sold by tender (bidding). Highly liquid and guaranteed, so banks' best-seller — though the return is small. |
| 3 — Loan bonds | Negotiable, indivisible certificates of equal face value given for money lent to the company as a long-term loan, raised by public subscription. The issuer repays with interest. |
Common mistake
Bonds are long-term loans — except treasury bills,
which are short-term (three months). The prize
certificates are still interest-bearing.
Lecture 7 · Corporate bonds
11 The three corporate bond types
| Type | Face value vs. amount paid | What's special |
|---|---|---|
| Ordinary | Equal | Face value back at maturity + fixed interest on it |
| Redeemable with an issue premium | Face value higher than the amount paid | e.g. face 1000 SAR, paid 900 SAR → the 100 SAR is paid back at maturity. Interest is on the nominal value, not the issue value. |
| Guaranteed | Equal | Backed by a personal guarantee (government or bank) or an in-kind one (a mortgage on the company's real estate) |
Mnemonic — O.P.G.
Ordinary, Premium, Guaranteed — "Only Pay Guaranteed".
Lecture 7 · Comparison
12 Bonds vs. shares
| # | Bond | Share |
|---|---|---|
| 1 — Nature | A debt on the company | A portion of the capital |
| 2 — Profit | Fixed, in profit or loss | Nothing if the company makes no profit |
| 3 — Rights | No assembly, vote, or control | Attends, votes, and monitors |
| 4 — Dissolution | Paid first | Paid only after bonds and debts are settled |
Mnemonic — N.P.R.D.
Nature, Profit, Rights, Dissolution — "No Partner Rights for Debt".
Lecture 7 · Ruling
13 Ruling of bonds and the lawful alternatives
Ruling — Prohibited
Bonds are based on riba, which the Qur'an and the
Sunnah forbid.
"Allah's Messenger ﷺ cursed the one who accepts usury, the one
who gives it, the one who records it and the two witnesses to it,
saying, 'They are all the same.'"Jabir — reported by Muslim
Lawful alternatives
| Who has a deficit | Alternative |
|---|---|
| A — Companies | Issue new shares, or form new partnerships / joint ventures |
| B — The government |
1. Good loans from individuals (no riba) 2. Collect zakat early — the Prophet ﷺ took Al-Abbas's zakat two years in advance 3. Encourage voluntary donations 4. Impose exceptional taxes to cover the deficit |
Mnemonic — L.Z.D.T.
Government: "Lend, Zakat, Donate, Tax".
Lecture 8 · Leasing
14 Leasing (Ijarah)
IjarahA contract transferring a known benefit (use) of an asset for a
specified period in exchange for an agreed payment.
Legal conceptThe owner (lessor) gives the user (lessee) the right to use an
asset — real estate, vehicles, equipment — for a period in return
for rent.
"Allah, the Exalted, says: 'I will be on the Day of Resurrection
against three (types of) people: One who makes a covenant in My Name
and then breaks it; one who sells a free man as a slave and devours
his price; and one who hires a workman and having taken full work from
him, does not pay him his wages.'"Sahih Al-Bukhari
| # | Owner (lessor) | Tenant (lessee) |
|---|---|---|
| 1 | Deliver the asset in usable condition | Pay the rent on schedule |
| 2 | Bear ownership risk and structural repairs | Maintain the asset properly |
| 3 | Reclaim the asset when the contract ends | Return the asset at the end of the term |
Common mistake
Structural repairs belong to the owner;
everyday maintenance belongs to the tenant. This
split is exactly what lease ending with ownership breaks (block 16).
Lecture 8 · Lease ending with ownership
15 Lease ending with ownership — two comparisons
The bank leases an asset (a car, a house) to a client for a set period, at a rent usually above market rent, and promises to transfer ownership through a separate agreement once all installments are paid.
| Installment sale | Lease ending with ownership | |
|---|---|---|
| Contracts | One contract | Two independent contracts (lease + ownership promise) |
| Ownership | Transfers immediately; payment is deferred | Transfers only at the end |
| Same in both | The goal (owning the asset) and the payment (installments over time) | |
| Lease ending with ownership | Standard lease | |
|---|---|---|
| Goal | Ownership after full payment | Temporary use only |
| Outcome | Tenant first, owner through a second contract | Tenant for the whole term |
| Contracts | Two (lease + transfer) | One (lease) |
Count the contracts
Installment sale 1 · Standard lease
1 · Lease ending with ownership
2.
Lecture 8 · Ruling
16 Ruling of lease ending with ownership
As practised — Not allowed
The name and the reality of the contract contradict each other:1. Inflated rent. The "rent" is above market because it secretly includes the price. If the contract ends early or the client can't pay, they lose what they paid and the asset.
2. Unclear contract. Is it a sale or a lease? Each has its own rules — making the tenant carry ownership risk and major repairs turns it into an invalid hybrid.
3. Uncertainty and unfair loss. Keeping all payments as rent after a mid-term default exploits the client.
Mnemonic — I.U.U.
Inflated, Unclear, Unfair.
Permissible when four conditions are met
1
Fixed period
The lease period is specified and lease rules apply throughout.
2
Fixed installments
Each amount is set, with no increase for late payment.
3
Transfer by gift or nominal sale
At the end, per the earlier promise between owner and tenant.
4
No down payment
So the tenant can't lose it if they can't finish paying.
Mnemonic — P.I.T.D.
Period, Installments, Transfer, no Down payment.
Lecture 9 · The sale contract
17 The sale contract and its seven conditions
Contract of saleAn agreement where one person transfers full ownership of an item
to another in exchange for money.
Ruling — Permissible
Qur'an: وأحل الله البيع وحرم الربا —
"Allah has permitted trade and has forbidden interest."Hadith: "Both parties in a business transaction have the right to annul it as long as they have not separated, or unless it is a sale with an option to cancel." (Bukhari 2112 / Muslim 1531)
1
Mutual consent
Both parties agree.
2
Legal capacity
Both are mature and of sound mind.
3
Legal permissibility
The item has recognised value in Islamic law and is lawful to use.
4
Ownership
The seller owns the goods at the time of the contract.
5
Deliverability
The seller can physically or legally deliver them.
6
Knowledge
Goods and price are clearly specified — type, quantity, weight,
description.
7
Execution
Carried out immediately, without delay or suspension.
Mnemonic — two people, one item, one deal
The people: Consent, Capacity. The
item: Permissible, Owned, Deliverable, Known. The
deal: Executed now.
Lecture 9 · Direct installment sale
18 Direct installment sale
DefinitionSelling with a markup over the cash price in exchange for delayed
payment or paying in installments.
ExampleA car costs 50,000 riyals cash; bought deferred for one year (or in
set installments) it costs 60,000 riyals. The extra is for the
extended time.
Ruling — Permissible if the price
is fixed
"Whoever pays in advance the price of a thing to be delivered should
pay it for a specified measure and a specified weight for a specified
period." (Bukhari 2240) — the people of Medina paid in advance for
fruit delivered two or three years later.
Common mistake
A higher deferred price is not riba, as long as it is
agreed and fixed at the start. It becomes a problem only if the price
grows when the buyer pays late.
Lecture 9 · Murabaha
19 Murabaha — the concept and its three elements
"A cost-plus sale where the seller fully discloses the item's original
cost and the markup charged."Murabaha (Cost-Plus Financing)
Originally a simple trade between buyer and seller; now a core financing tool of Islamic banks with three parties: the customer asks the bank to buy an item, the bank buys it, then resells it to the customer at an agreed markup paid in fixed installments. Some question it for resembling riba, but most scholars agree it is permissible.
| Element | Between | Rule |
|---|---|---|
| 1 — The promise | Client → bank | Not binding before the bank buys (breaking it can still be sinful). The bank may take no money yet — "Don't sell what you don't have." Once the bank buys, it is binding: the client buys or pays compensation. |
| 2 — First contract | Bank ↔ seller | An ordinary sale, allowed by scholarly consensus. The bank must fully own the goods and check them before the second contract. |
| 3 — Second contract | Bank ↔ client | A profit sale paid in installments — permissible under five conditions (block 20). |
Mnemonic — "Promise, Purchase, Profit"
The client promises, the bank purchases, the bank resells at a profit.
Common mistake
The promise is not binding before the first contract and
is binding after it. And the bank can't take a deposit before
it owns the goods.
Lecture 9 · The second contract
20 Five conditions for the second contract
a
Agree on cash or deferred
And specify the price.
b
Profit inside the price
Installment interest is never listed separately from the basic
price.
c
No late-payment increase
The price can't grow if the buyer falls behind.
d
No usurious items
Not gold, dates and similar items that must be exchanged on the
spot, because Murabaha payment is deferred.
e
Guarantees allowed
The bank may secure its rights with a warranty or mortgage.
Mnemonic — "Fix it, fold it, freeze it"
Fix the price (a), fold the profit
into it (b), freeze it when payments are late (c) —
then keep out usurious items (d) and secure with a guarantee (e).
Common mistake
Murabaha vs. lease ending with ownership: in Murabaha the client owns
the goods as soon as the second contract is signed; in the lease they
own only at the end.
Exam radar
21 Highest-yield items for Midterm 2
| Item | Say it in one line |
|---|---|
| Title vs. debt deeds | Shares = title deeds (ownership); bonds = debt deeds (loan). |
| Bourse origin | Huis Ter Beurze, Bruges, Belgium — Robert van der Buerze, 1285. |
| Broker vs. dealer | Broker trades for a client; dealer for their own account. |
| E.I.T.N. | Equal, Indivisible, Tradable, Nominal — shares and bonds alike. |
| N.I.R.M. | Nominal (fixed), Issue (IPO), Real (assets − liabilities), Market (exchange). |
| Preferred shares | Not permissible — fixed profit is riba, unequal rights are unjust. |
| Enjoyment shares | Not permissible — profit after recovering capital + lottery gharar. |
| R.R.N. | Classified by Rights, Recouping, Nature. |
| Share trading | No interest loans, no short selling; collateral and installments allowed. |
| Zakat on shares | Investor: company pays. Trader: market value at the lunar year's end. |
| Treasury bills | Short-term (three months), by tender, liquid, small return. |
| Issue premium | Face 1000, paid 900 — interest on the nominal value. |
| N.P.R.D. | Bond vs. share: Nature, Profit, Rights, Dissolution. |
| L.Z.D.T. | Government alternatives: Lend, Zakat early (Al-Abbas), Donate, Tax. |
| Contract count | Installment sale 1, standard lease 1, lease ending with ownership 2. |
| I.U.U. / P.I.T.D. | Why it's banned / the four conditions that make it allowed. |
| Seven sale conditions | Consent, Capacity, Permissible, Owned, Deliverable, Known, Executed now. |
| Installment sale | A higher deferred price is fine if fixed — 50,000 cash vs. 60,000 over a year. |
| Murabaha's three elements | Promise (client → bank), first contract (bank ↔ seller), second contract (bank ↔ client). |
| When the promise binds | Not before the bank buys; binding after — buy or compensate. No money taken before. |
| Second contract | Price fixed, profit inside it, no late increase, no usurious items, guarantees allowed. |
Final check
22 Flashcard glossary
Click or press Enter on a card to flip it. If you hesitate on one, go back to the block above it.