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There are many different ways to invest. Increasingly, investors have begun to actively seek out opportunities to invest according to their personal beliefs, whether it be investing in ESG or avoiding sinful stocks or oil companies.
Halal investing is another type of value-based investing. Halal is an Islamic concept which means that it complies with Muslim law. While the exact interpretation of what can and cannot be invested varies, it is generally a conservative investment approach.
By creating a halal investment portfolio, Muslims can accumulate wealth in a way that aligns with their religious faith. However, many traditional portfolios are not halal, which means that Muslim investors who want to invest according to their faith should do a little more research.
the short version
- Halal investing is a form of investing that adheres to Islamic law, although there may be debate about what is considered halal.
- While there are similarities to ESG investing, it is generally much stricter as it takes into account not only the type of company invested in, but also the type of transaction.
- Muslim investors who want to adhere to halal may need to do more research to ensure their investment portfolios are aligned with their faith.
What is Halal investment?
Halal is an Islamic concept that means that something is allowed by Sharia law, which is a set of values based on the teachings of the Qur’an. It is often used to refer to food, but can also be used in reference to investment.
Halal investment is a type of investment that complies with Sharia law. In a way, it is a type of specialized socially responsible investing. As with SRI investing, halal investing considers what type of activity is being invested in, as well as opportunities to make a positive impact, such as charity.
Specific types of investment, or haram, which means “forbidden” in Arabic, are prohibited. This includes most corporations, as well as businesses that don’t have a lot of debt or interest income. Investment guidelines may vary as the interpretation of Islamic law can be nuanced. Islamic scholars often debate some details of halal investing, such as whether cryptocurrencies are considered halal.
In short, halal investing allows Muslim investors to increase their wealth while ensuring that their investments are aligned with their faith.
The pillars of Halal investment
If an investor wants to ensure that his investment portfolio is halal, he must follow four main guiding principles. There is also a 5% rule that is often used to determine whether or not a company’s main source of business is illegal. If a business has more than 5% of revenue coming from a prohibited industry such as lending, it is not considered halal.
>Interest as income
Under Islamic law, paying or charging additional interest is considered usurious and exploitative. An investor who wants to ensure that his investments are halal should generally stay away from anything that focuses on generating income from interest, such as debt products or loans. For example, investing in bonds is not considered halal because you are essentially making a loan and earning money from the interest.
It is important to note that there is a distinction between compound interest earned when investing and interest charged by a bank or lender. While investing in a payday lender, for example, may not be considered halal, accruing interest from investing in stocks may be halal, depending on the company and the sector in which it is invested.
>Industries of sin are prohibited
There are specific industries that are considered haram or prohibited by Islamic law. These industries or investments are often referred to as sin stocks.
Specific industries that are haram include alcohol and tobacco, adult entertainment, gambling, weapons, traditional finance, and pork products. In general, Muslim investors may want to consider staying away from investing in those sectors and instead consider other areas to invest in.
>Give to charity
Another fundamental principle of Islamic law is to give priority to charity. The idea is that if you make a lot of money, you should give more back to the community. One way Muslim investors can ensure their investments are halal is to donate a portion of their profits to charity.
Because it can sometimes be difficult to build a portfolio that is 100% halal, it is also a way to pay back interest earned from practices or industries that are not considered halal. For example, if a company earns 3% of its income from interest, which is considered prohibited, a Muslim investor can, in turn, donate 3% of their earnings to charity. That way, the investor does not benefit from haram practices and instead uses that money to benefit his community.
>Do not assume risks, speculations or debts
Speculation and very risky investments are also discouraged under Sharia law. Some may consider things like short selling or options as haram as they are very risky and speculative investments. Islamic law prohibits gambling, so any investment deemed to be based on luck is often prohibited.
Also, Muslim investors may want to avoid investing in companies that have a lot of debt. That’s because Islamic law prohibits borrowing too much. Before investing in a company, it’s important to look at not only how it makes money, but also its debt ratios.
As we mentioned above, there are some investments that are considered halal by some and not by others, but these are generally the top tenants who agree. Be sure to consult your own personal beliefs about halal as well as your personal financial circumstances to determine the best investments for you personally.
What are Halal investments?
Finding investments that are halal can be difficult and requires a bit more work than your standard 60/40 investment portfolio.
You can invest in shares as long as they are halal. Before buying shares in a company, a Muslim investor should ensure that they are not making money from prohibited stocks or investing in a sector that is considered risky or speculative, depending on how they interpret the law.
The same concept applies to funds like stock mutual funds, index funds, and exchange-traded funds. Investing in funds can be a bit trickier as they are made up of many different types of stocks.
Another halal investment is sukuks. This is an Islamic investment concept similar to bonds, but instead of paying interest, the lender receives interest if the financed project is successful. It differs from a typical non-Shariah compliant loan or bond because the interest is not guaranteed.
Other types of investments considered halal are gold and precious metals and some real estate investments, as long as they do not receive interest on a loan.
How is Halal investing different from ESG and SRI?
While there are some similarities between halal investing and other socially conscious investments like ESG and SRI, halal investing is based on religious law. It is also much stricter than other types of ethical investing. Halal investing prohibits not only specific types of investments, but also takes into account how those investments are traded.
ESG investing, on the other hand, considers factors such as social and environmental impact and governance issues. A halal investment can be ESG, but not all ESG investments are considered halal. For example, green bonds are not considered halal because they are considered loan products, and Islamic law prohibits generating income solely from interest.
How to find Halal investments
There are several investment apps that are specifically designed for halal investments and follow the halal investment guidelines.
- zoya It is an investment platform that was built by Muslims, so it is likely to be your first stop for halal investing. You can even access Shariah compliance reports and filter investments based on compliance status.
- aghaz is another investment platform built by Muslims specifically to facilitate halal investment. Their portfolios are maintained to AAOIFI standards.
- wahed it has the tagline “Halal Investing Made Simple”. They have a Shariah compliance board that evaluates all potential investments, so it’s easy to put together a halal investment portfolio.
But you’re certainly not limited to just apps that specifically serve halal investors. Several mainstream investment apps also have halal investments. Wealthsimple has a halal investment portfolio and M1 Finance allows you to create your own custom cakes so you can make halal investments.
There is even an index for the S&P 500 Sharia.
The bottom line
By now, the investing world has made it possible to build an investment portfolio that fully aligns with your personal beliefs and values.
However, halal investing can be more complicated than other types of value-based investing. Although there are generally four basic principles of halal investing, the exact interpretation of Shariah law can vary. If a Muslim investor wants to invest but wants to ensure that his portfolio is halal, he will need to make sure to do extensive research on the companies he is investing in.
Fortunately, there are more resources than ever before to serve halal investors in North America.
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