Global عربي
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Global عربي
Financial planning for retirement is essential, but may prove challenging for the Shariah-compliant retiree looking to ensure that their retirement financing isn’t tainted by conventional finance.
Today, we look at the principles of halal investing and how they can prove crucial for retirees looking for financial security and doing it in a halal manner.
Retirement plans are all based on investing, so it is critical to note what constitutes Shariah-compliant investing:
- The absence of interest or usury (or “Riba”) as it is explicitly forbidden in the religion.
- Usage of the asset as a speculative instrument must be minimized as much as possible and contracts must be clear and transparent in order to avoid Gharar.
- One must not use the investment or invest in companies that engage in banned or forbidden activities.
- Gains in Islamic finance must be based on profit and loss sharing or income from goods and services rendered.
Read more about: The Basics of Shariah Compliant Profit & Loss Sharing Models
Before one can dive into the various halal retirement plans that can be made, it is crucial to look at some of the concepts and principles that are necessary to ensure these plans comply with Islamic principles.
These principles cover essential steps that investors need to take into account to ensure their retirement plans are halal.
Zakat is an annual Islamic obligation whereby Muslims who have accumulated wealth beyond their basic living needs and expenses – an amount known as the nisab – must tithe 2.5% of that wealth accrued over the past year.
Nisab is calculated on separately on each class of wealth (financial instruments, real estate, goods and commodities, etc.), including investments, even if they are held in a taxable retirement or brokerage accounts.
It is crucial to note that the amount of Zakat set is not simply based on the value of the assets alone, but on its purpose, tax status and penalties and taxes incurred from selling off the assets, according to a paper by Wahdi Capital’s Heather Hughson and Muhammad Wahdi.
If a financial asset is held with the purpose of capital gains, then it is taken from purely from the market value, but if it is held to generate an income, then zakat is only taken out from the income generated over the past year.
Zakat is not only an obligatory tithe, but it is also a very convenient way to ensure that an investment is halal.
Zakat is used in a number of Islamic investment strategies, such as purifying shares that may not fully comply with Shariah principles (more on that below) or even as a way to distribute investment gains in an Islamic insurance scheme (Takaful).
Read more about: Comparing Conventional Insurance vs. Takaful "Islamic Insurance"
Owing to the fact that global trade and finance is interconnected, it is very difficult for a company or asset to be 100% halal. This is especially true for retirees with 401k retirement plans, where they have very little control of their investment
Read more about: Is 401k Halal? A Guide to Halal Retirement Plans
Furthermore, those with individual retirement accounts (IRAs) – which gives them more control over their investments – may be taking on excessive risk by only investing in halal stocks, according to Hughson and Wagdi.
In order to diversify, it is incumbent on the investor or retiree to ensure that these components of their portfolio are cleansed through the process of purification.
Purification is a key component to “halal” investing, especially if there are haram or non-shariah compliant components to an investment. Islamic finance has a threshold by which companies may engage in “doubtful” activities – namely, 5%. Investing in companies that exceed that threshold is forbidden.
For companies with a threshold above that amount, it is permissible to calculate exactly how much of that investment is haram and donate that amount to charity.
Read more about: What Are Pension Funds & How They Work?
As the saying goes, “prevention is better than the cure.” And so, screening for halal investments, stocks, and retirement funds and plans is a must to ensure that the retiree’s investments are Shariah-compliant.
It is a method to ensure that the portfolio’s components do not exceed the threshold noted above.
The safest way to engage in halal retirement investing is to choose assets that are inherently halal: such as real estate, gold and other commodities, etc.
But it becomes important to apply the screening accounting for financial securities. Another method is to invest in assets with an IdealRatings and Amanie certification – with the former designating Shariah compliance and other designating ethical and ESG metrics are applied.
And finally, there is investing in Shariah-compliant mutual funds and other investment vehicles that are certified as Shariah-compliant.
Read more about: Screening for “Halal” stocks and how to purify them?
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
