A very high percentage of Muslims consider bank interest as forbidden. Firstly they do not even try to understand the difference between interest and usury. What is forbidden is usury. Anything that accrues fron exploitative means is forbidden not just usury. Very high percentage of Muslims does not consider mutual fund investment as forbidden. Stock market is basically based on speculation. Even the Initial Public Offering is much higher than the intrinsic value of the share. Both the concepts—interest is forbidden and investment in mutual funds is ok—are based on wrong interpretation of the spirit of Quranic guidance. During the middle ages there were only money lenders, the likes of Shylock and our own mahajans. Their dealings were exploitative in nature and purpose.
Let us examine Mutual fundds that essentially deal with stock market, a speculative trade. They buy shares on behalf of the members, those who buy bonds. The most important dealing of the mutual funds is in Futures and Options. It was called Badla before it was given this respectable name. There are Dalals, who are now respectfully called Stock Brokers. Remember Dalal Street in Mumbai?
What are Futures and Options? In this trade one buys shares without investing money but financed by brokers or mutual funds at an exorbitant interest. If the share value goes up the investor apart from interest also gets a share of the increase in share value. And this so called trade is acceptable to Muslims.
Even buying of shares from the brokers directly is based on hypothesis, a respectable name for speculation or gamble. The official term for such speculation is ‘efficient market hypothesis’. So how is it that investment in mutual funds is considered permitted? Should Allah have used the words mutual funds for Muslims today to understand that it is gambling?