The world of investing can seem daunting, but for those seeking to adhere to Islamic finance principles, it can feel even more challenging. Halal investing is a growing area of interest for the Muslim community, and with good reason. Ensuring that all sources of income are halal is a critical component of Sharia law, and Islamic finance places great importance on this.
However, with the right knowledge of investment products and how they work, it is possible to assess if an investment aligns with these principles. By educating oneself on halal investing, Muslims can feel confident in making informed financial decisions that are in line with their values.
What does "halal" mean?
For those who don't already know, halal means "lawful" or "permitted" according to the Islamic religion. By choosing to invest in a halal manner, you can ensure that your money goes towards companies and practices that align with your principles.
As a Muslim investor, it’s also crucial to understand the deeper understanding of the Arabic word “haram” and its implications in the world of finance. By knowing what types of investments are considered “unlawful” or “not allowed” according to Islamic religious texts, you can confidently navigate the complex world of finance without compromising your beliefs.
Halal and haram are guiding principles for Muslims that cover everything from what you may eat and drink to how much risk you may take on when investing. But more on that shortly.
What is halal investing?
Halal investing is a unique form of investing which complies with Islamic law and is shaped by Islamic scholars who provide guidance on topics such as interest, debt, risk, and social responsibility. This type of investing adheres to the principles of Shariah law, protecting and preserving areas such as religion, life, intellect, family, and property.
Not only is halal investing a responsible way to grow your wealth, but it also aligns with social values and ethics of the Islamic community. By investing in businesses that are Shariah-compliant, you can be confident that your money is being put towards companies that operate ethically and responsibly - should that be the route you want to go down.
The following points form the six foundations of Shariah-compliant or halal investing:
- Sharing of profit
- Prohibition of riba (unjust, exploitative gains)
- Gambling prohibition
- Investing in lawful activities only
- Upholding of ethical and moral values at all times
- Being successful and functional with the real economy
Make a difference with your money.
Halal investing basics
So what does that mean when it comes to the world of investing?
1. Not profiting off interest
It's important to note that there are certain restrictions for Muslim investors, such as the prohibition of debt and charging or paying interest. While this may seem limiting, there are still plenty of opportunities for halal investors. The Accounting and Auditing Organization for Islamic Financial Institutions has provided guidelines for earning a minimal amount of interest income from investments, but with the stipulation that it doesn't exceed 5% of the total income from prohibited sources.
It's also worth noting that companies with a significant amount of debt are typically not considered halal investments. By researching and carefully selecting companies that adhere to halal principles, you have the power to invest in a way that not only aligns with your beliefs but also has the potential for significant financial gain.
2. No high-risk investments
In particular, it means avoiding interest-bearing loans and debt. The Islamic laws also prevent gambling, prohibiting investments with a high risk factor. It's no secret that navigating the world of finance can be tricky, but Halal investing offers peace of mind and the opportunity to invest in a way that aligns with personal values and beliefs!
3. Not investing in haram companies
Despite the potentially lucrative nature of alcohol, pornography, gambling, and pork products, they are non-negotiable for those who wish to remain within the boundaries of halal investing. While it may seem limiting, there are still plenty of options available to those who prioritise their values above all else. From technology to healthcare to renewable energy, there are plenty of industries that align with the principles of halal investing, and offer exciting opportunities for growth and profit!
4. Donating profits
Halal investors are often encouraged to take any money that comes from haram investments and donate it to charity. Whether it's supporting education, healthcare, or other important causes, donating to charity is a fun and empowering way to channel your halal investments towards something truly meaningful.
So overall, halal investing looks like investing in secure, low-risk opportunities while avoiding any association with unlawful industries or products. And if a small portion of your income does end up coming from those sources, you can feel empowered knowing that you’re able to donate it to charity and make a positive impact.
What halal investing looks like
There's a slew of options out there - from stocks to index funds to ETFs and even REITs - that fit within the guidelines for halal investing. And while there are certain investments that may not make the cut, that doesn't mean you have to sacrifice your returns or stick to a limited selection.
By investing in company stocks selling halal-compliant products or services, you can support businesses that align with your values and beliefs. But don't be fooled into thinking this means you have limited options. On the contrary, there are plenty of financially stable companies out there creating amazing products and services that meet the halal requirements. So go ahead, do your research, and find those gems that fit your criteria.
2. Funds and ETFs
Funds like mutual funds, ETFs and index funds are all on the table as long as they match with halal principles. While it can be tough to track down funds with all halal components, there are shariah-compliant funds out there - and they're easier to find than you might think!
3. Real estate
Real estate is not only a great way to diversify your portfolio, but it can also be a halal investment as long as you're not profiting from the interest charged on mortgages. And if you're looking to earn some passive income, renting out property could be a smart move.
But that's not all – halal investors also often turn to precious metals like gold as a way to protect their wealth. By investing in these tangible assets, you can have peace of mind knowing that your money is secure, no matter what happens in the market.
You should definitely check out sukuk, which is a sharia-compliant bond-like instrument used in Islamic finance. Compared to conventional bonds, sukuk involves direct asset ownership interest, making it a more ethical financial product. While both sukuk and bonds offer payment streams to investors, income derived from sukuk cannot be speculative, which ensures that it remains halal.
Halal Investing tips
1. Understand the concept of halal investing
Halal investing is investing in businesses that align with Islamic principles. These principles include avoiding investments in companies dealing in prohibited products, such as alcohol, gambling, and tobacco. Additionally, it also involves steering clear of businesses involved in haram (forbidden) practices such as riba (interest).
To maintain adherence to Islamic principles, halal portfolios typically comprise of companies that operate in sectors such as healthcare, technology, and consumer goods. Nevertheless, different halal funds and financial products often have varying criteria for investment.
2. Research halal investment options
It's important to note that not all halal investments will align with your personal values or financial goals. To find the best investment option for you, it's essential to research and compare different financial products and fund managers.
Different types of investment options are available for halal investors, including stocks, mutual funds, exchange-traded funds (ETFs), and more. Consider your risk tolerance as well as your investment timeline before making a decision.
3. Check the accreditation
Several Shariah supervisory boards certify businesses and financial products as halal. Before investing in any financial product, verify its certification with a reputable Shariah supervisory board or an Islamic financial institution. This will ensure that the product complies with Islamic finance principles.
4. Seek professional financial advice
Whether you're new to investing or have been investing for a while, it's crucial to seek the advice of an experienced financial advisor. They can help you navigate complex financial jargon and help you make informed decisions regarding your halal investments.
5. Stay informed about your investments
Once you've made your investments, it's essential to keep yourself up-to-date with the performance of the assets you own. The market constantly shifts, so it's essential to regularly monitor your investments and make adjustments if necessary.
The bottom line
Halal investing is a powerful way to both grow your wealth and make an impact. By choosing secure and low-risk investments that align with your values as a Muslim, you can rest easy knowing that your money isn't going towards any shady or unethical industries.
It's a win-win for your wallet and your community. Whether you're looking to generate short-term profits or a long-term nest egg, halal investing can help you achieve financial freedom while upholding your values.