What is Halal Investing?
Halal means anything permitted by Shariah i.e., lawful.
Halal investing, therefore, is putting money to work for some time with the expectation of a return, on something permitted by Shariah (halal).
The Shariah prohibits certain financial activities. Let’s explore just a few of these.
Riba & Usury
Riba means excess. It is a sin and is explicitly prohibited in the Quran and Sunnah:
يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوا۟ لَا تَأْكُلُوا۟ ٱلرِّبَوٰٓا۟ أَضْعَـٰفًا مُّضَـٰعَفَةً ۖ وَٱتَّقُوا۟ ٱللَّهَ لَعَلَّكُمْ تُفْلِحُونَ
One of the main problems of Riba is that it separates finance from the real economy. It also divides debt creation from wealth creation which leads to an inverted debt pyramid where debt grows at a faster pace than wealth. Thus, an increasing amount of debt needs to be serviced by decreasing the amount of wealth, making the system unsustainable. Thus, a correction is usually needed to balance debt and wealth levels and those corrections occur in the form of recessions where debt is written off, like in the 2008 financial crisis.
Scholars have given different definitions of Gharar. It is prohibited because of the level of uncertainty in the transaction. This can be from deceptive uncertainty to outright fraud. One example is selling fish you haven’t caught because the purchaser may or may not get it. Another example is selling a watch that is lost or stolen.
Qimar & Maisir
Maisir means speculation or gambling.
In the Quran, Allah states:
۞ يَسْـَٔلُونَكَ عَنِ ٱلْخَمْرِ وَٱلْمَيْسِرِ ۖ قُلْ فِيهِمَآ إِثْمٌ كَبِيرٌ وَمَنَـٰفِعُ لِلنَّاسِ وَإِثْمُهُمَآ أَكْبَرُ مِن نَّفْعِهِمَا ۗ وَيَسْـَٔلُونَكَ مَاذَا يُنفِقُونَ قُلِ ٱلْعَفْوَ ۗ كَذَٰلِكَ يُبَيِّنُ ٱللَّهُ لَكُمُ ٱلْـَٔايَـٰتِ لَعَلَّكُمْ تَتَفَكَّرُونَ
In another place, Allah says:
يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوٓا۟ إِنَّمَا ٱلْخَمْرُ وَٱلْمَيْسِرُ وَٱلْأَنصَابُ وَٱلْأَزْلَـٰمُ رِجْسٌۭ مِّنْ عَمَلِ ٱلشَّيْطَـٰنِ فَٱجْتَنِبُوهُ لَعَلَّكُمْ تُفْلِحُونَ
Maisir is prohibited because it creates wealth from chance instead of productive activity. Therefore, certain financial products such as options, futures, and other derivatives are generally not used.
Haram Activities and Commodities
Using or dealing with haram activities or commodities (for example, alcohol) is prohibited. Before a Muslim invests in a business, they should undertake a screening process to ensure the industry and the asset class are halal and Sharia compliant.
Why Is Halal Investing Important?
Shariah governs all aspects of life, including our investments. Ultimately, we will be questioned on the day of judgment on how we spent our wealth.
Furthermore, we should be careful about two things: hoarding wealth and spending excessively. This is important to remember when it comes to both halal investing and our wealth in general.
۞ يَـٰٓأَيُّهَا ٱلَّذِينَ ءَامَنُوٓا۟ إِنَّ كَثِيرًا مِّنَ ٱلْأَحْبَارِ وَٱلرُّهْبَانِ لَيَأْكُلُونَ أَمْوَٰلَ ٱلنَّاسِ بِٱلْبَـٰطِلِ وَيَصُدُّونَ عَن سَبِيلِ ٱللَّهِ ۗ وَٱلَّذِينَ يَكْنِزُونَ ٱلذَّهَبَ وَٱلْفِضَّةَ وَلَا يُنفِقُونَهَا فِى سَبِيلِ ٱللَّهِ فَبَشِّرْهُم بِعَذَابٍ أَلِيمٍ
Although this verse in the Quran is addressed to Muslims, it is referring to the conduct of rabbis and monks. However, perhaps it still serves as an important warning to Muslims in remaining vigilant against such conditions. Many Hadiths admonish hoarding gold and silver and encourage trade on the other hand. Similarly, according to the World Bank, trade is central to ending global poverty.” It further adds that “open trade also benefits lower-income households by offering consumers more affordable goods and services”.
Not only is hoarding admonished, but Islam also teaches us to protect our wealth and prevent it from loss. For a start, if your left is left idle, it will be consumed by Zakat as Muslims are obliged to annually donate 2.5% of their total savings to those in need.
However, it is worth noting that this only applies to Muslims who meet a certain financial threshold.
Whilst thinking of protecting your wealth you should also consider inflation and aim to
inflation proof your assets. Everything is getting more expensive and as the prices of goods and services rise, your money in turn loses its value. US consumer prices rose by 8.3% in the year to August, the fastest rate in almost 40 years, the Labor Department recently said.
What can be done to minimize the effects of this? The key thing to remember is that you should invest otherwise your money will lose its value as the prices of goods and services increase. Your aim should be to make the right investments to counter the effects of inflation– something we’ll discuss in detail in a later blog.
Halal Asset Classes
The majority of asset classes are deemed as Halal but not necessarily all assets within each asset class. The most common and most accessible are set out below.
Equities (Stocks and Shares)
This is one way of investing in a business and is completely halal.
It is where you can buy a piece of a business, entitling you to a proportion of their assets and profits equal to how much stock you own.
However, this can only be done in a business where you have undertaken a Sharia screening to ensure your investment is halal.
Fixed Income (Sukuk)
Conventional bonds, as mentioned above, are haram because of their interest-bearing nature. However, a Sukuk is an Islamic bond and has fundamental differences from a normal bond, namely that they must comply with Sharia. Sukuks are debt obligations like bonds but represent an ownership interest in a asset/s. Furthermore, you do not receive interest but rather a portion of revenues generated by the assets they own.
When investing in property, you’re looking for at least one of two things:
- Rental income
- Profit from a resale.
However, not all property investment is considered halal. For example, you must purchase your property with halal money. You also cannot collect rental income from a haram business, such as a casino.
Alternatives (Private Equity, Private Finance, and others)
Private Equity is where you invest in a company in before it goes public, i.e. floats on the stock exchange. There are several Sharia-compliant PE funds but those tend to cater to High-Net-Worth Individuals (HNWIs) and institutions and are out of reach for retail investors. Recently, technology and regulatory developments have made it easier for retail investors to participate in such investments. For example, equity crowdfunding is a form of private equity and so is angel investing.
Similarly, Private Finance or as known conventionally Private Debt/Credit involves lending to private companies directly or through a fund. These funds also primarily target HNWIs with very few being Shariah-compliant. However, one can get exposure through the asset class through crowdfunding platforms that finance SMEs.
Other types of alternatives include hedge funds, commodities, derivates, and arts and antiques.
Islamic Savings Accounts
Islamic savings accounts are Sharia-compliant bank accounts. This is because your savings will not accumulate interest.
Islamic banks will grow your money through Sharia-compliant investments (usually by giving the money out to people buying their homes).
Based on those returns, the savings accounts offer an expected profit rate (EPR). The difference between interest and EPR is that the former must be paid, while the latter
One should be aware of what makes a transaction halal as we are ultimately responsible for how we spend our wealth. Although there are certain restrictions on how Muslims can invest, there are plenty of options for inspiring investors to build Halal portfolios.