Understand liquid vs illiquid assets, why pure cash shares are different, and the main scholarly approaches Read the bilingual lesson for Equity Investment: When Are Shares Tradable? and test your understanding with a focused quiz.
Lesson
1. Why the Assets Behind a Share Matter
A share is not only a number on a screen. It represents a proportionate interest in the company’s underlying assets. Therefore, the Shari‘ah ruling on trading that share depends partly on what the company actually owns.
If the company owns factories, machinery, inventory or other non-cash assets, the share represents more than money. If the company owns only cash and receivables, the share becomes much closer to a monetary claim.
2. If All Assets Are Liquid
If all company assets are cash, the share represents money. Money of the same currency cannot be exchanged for a different amount merely because it is packaged inside a share certificate.
Therefore, where the share represents only money, trading it above or below its proportionate cash value creates the same issue as exchanging unequal amounts of the same currency.
3. What Are Illiquid Assets?
Illiquid assets are assets that are not simply cash or immediate monetary receivables. Examples include land, buildings, machinery, inventory and other tangible business property.
These assets matter because when a share represents both money and real assets, the transaction is no longer a simple money-for-money exchange.
4. View 1: At Least 51% Illiquid Assets
One contemporary view requires at least 51% of the company’s assets to be illiquid before its shares are freely negotiable. The reasoning is that if the majority of assets are real/non-cash assets, the share may be treated primarily as an ownership interest in those assets.
This approach uses the principle that the majority can determine the character of the whole.
5. View 2: A Lower Threshold Such as 33%
Another scholarly view accepts negotiability even when illiquid assets are around one-third of total assets. The idea is that a significant tangible component may be enough to prevent the share from being treated as pure money.
This shows that the exact percentage is a juristic issue on which contemporary scholars have differed.
6. The Hanafi Approach: No Fixed Percentage, But Two Conditions
The Hanafi approach described does not require one fixed percentage of illiquid assets. Instead, two conditions are emphasized.
First, the illiquid portion must not be trivial or negligible. Second, the sale price of the share must be higher than the amount of cash represented inside that share, so that some part of the price can genuinely be attributed to the non-cash assets.
7. The $100 Share Example
Suppose a share represents $75 in cash plus a proportionate interest in fixed assets. If the share is sold for $105, then $75 may be treated as exchange for the $75 cash component and the remaining $30 as price for the fixed assets.
This gives a simple way to see why the total price can be higher than the cash component when real assets are also represented.
8. Why $70 or Exactly $75 Creates a Problem
If the same share is sold for $70, then the $75 cash component is effectively being exchanged for less than $75, which creates an impermissible inequality in money exchange.
If the share is sold for exactly $75, then no part of the price remains to be attributed to the fixed assets. Therefore, under the reasoning described, both cases create a problem.
9. The Practical Takeaway
When screening a share, do not look only at the company’s business activity. Also ask what the share represents at the asset level: cash, receivables, inventory, plant, property and other assets.
Tradability is therefore a second layer of Shari‘ah screening after business permissibility.
Practice questions
Question 1
Why does the asset composition of a company matter for share trading?
- A share represents an interest in the underlying assets
- Shares are only numbers
- Only dividends matter
- Asset type never affects Shari‘ah treatment
Question 2
If a company owns only cash, its shares may freely trade at any premium or discount.
Question 3
Which is an example of an illiquid asset?
- Machinery
- Cash balance
- Immediate receivable only
- Currency note
Question 4
What does the 51% view require?
- A majority of assets should be illiquid
- All assets must be cash
- No real assets are needed
- Only debt may be held
Question 5
Under the Hanafi approach described, what are the two main conditions?
- Illiquid assets are not negligible and price exceeds the cash component
- Exactly 51% and fixed dividend
- No cash and no debt
- Only one asset class
Question 6
In the $75 cash plus fixed-assets example, selling at $105 can be understood as allocating part of the price to fixed assets.
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