Short Selling of Stocks
Naked and covered short selling
Conventional short selling is impermissible as it involves selling what one does not own, which is prohibited in Islamic law. This prohibition applies to both naked and covered short selling structures.
Accounting and Auditing Organisation for Islamic Financial Institutions
Full Ruling
Conventional short selling — selling securities one does not currently own, with the intention of buying them later at a lower price — is prohibited under Islamic law. The Prophet (ﷺ) explicitly prohibited 'selling what you do not possess' (la tabi' ma laysa 'indak). This prohibition is absolute and applies to both naked short selling (no borrowing of underlying asset) and covered short selling (borrowing via conventional securities lending, which involves riba). No purification mechanism exists for the prohibited structure itself.
Rationale & Reasoning
The prohibition flows from the hadith 'Do not sell what you do not have' and the requirement for existing, deliverable ownership (qabd) before sale. Securities lending for short selling purposes also involves riba through the lending fee structure.
Rule Basis (Daleel)
- 01Hadith: 'La tabi' ma laysa 'indak' (Do not sell what you do not own)
- 02Requirement of qabd (possession) before sale
- 03Prohibition of riba in securities lending
Citations & Sources
AAOIFI Shariah Standard No. 21 – Financial Papers (Shares and Bonds)
AAOIFI · 2002
Ref: SS-21