If you want to invest in commodities in accordance with Sharia principles, either as part of your company’s operations or to diversify your assets, the first point to bear in mind is of course, to only invest in permissible commodities, e.g. not tobacco plants.
Moreover, because speculating is forbidden under Islamic law, speculating on commodities with the sole aim of making a profit is no more permissible than with any other type of instrument. Therefore, the prevailing view is that commodity trading is only permissible if both their payment and delivery are immediate.
However, commodities producers do need financing to support their activity, and investing in this light is generally acceptable (as always, if you want to be on the safe side, consult your bank’s sharia advisory board). Most accepted commodity investments can be made using either a Salam transaction or a commodity Murabaha.
Salam is a Bay’ contract, i.e. an agreement for the sale or trading of a specific asset at a fixed price, in this case a particular commodity to be delivered at a future date. The price, quality and quantity of the commodity must be agreed in advance to avoid uncertainty about the transaction.
Like Istisna, Salam contracts are an exception in Islamic finance because they are the only halal trade agreements where the goods do not yet exist when the parties enter into the contract. This is because the agreements are designed to help producers grow (in Salam) or manufacture (in Istisna) the goods in question, and are therefore allowed provided all the terms of the contract are clearly specified.
The price paid for the goods may also be lower than its market price as the payment is made in advance. Therefore, one way of investing in commodities is to buy them through a Salam contract, either to use the commodities for your own business activity or to sell them on when they are delivered.
A commodity Murabaha is slightly different because it is based on existing goods. It is the most common Islamic financing contract, in which the financier buys an asset (or commodity) for its client, who then buys it back over time, with an agreed profit for the investor. Therefore, to invest in commodities you can ask your bank to arrange a commodity Murabaha in which you will be the financier, funding a business in return for an agreed profit.
Of course, if your company is involved in producing commodities or uses them to manufacture other goods, you can also use Salam and Murabaha contracts as a permissible method of financing your operations.
In fact, even if your business isn’t commodity-based, you can use commodity Murabaha as a permissible method to finance your company. This type of commodity Murabaha will then involve an extra step: once your bank has bought the commodity and delivered it to you, you can sell it to a commodities broker straight away in exchange for immediate cash, while continuing to repay your bank over time (plus their agreed profit, of course).
Finally, institutions based in the UAE can now trade in commodities on the Dubai Multi Commodities Centre (DMCC), whose sharia-compliant commodity trading platform is designed to help banks and other organizations manage their liquidity needs through commodity Murabaha-based trade deals. It allows tracking of the ownership of the commodities involved in each deal, ensuring in this way that all trades are based on real assets, and that therefore they remain sharia-compliant.
Originally published on www.zawya.com