Halal Investment - A Beginner's Guide

by Shazia Hussain

As the Muslim population globally continues to grow, so too does the appetite for investing, trading, working within Sharia compliant investments. Halal investing requires the investor to know all about investment products, how they work, and then it is possible to assess if the investment is in line with Islamic finance principles. For Muslims, one of the most critical aspects of Sharia law is ensuring that all income sources are halal. Islamic finance places huge importance on ensuring that income is halal (legitimate) and this is enshrined in the Quran.

Historically, the focus of halal and haram has been most prominent when it comes to food, but the concept of halal and haram must also be applied to all things beyond food including lifestyle, finances, investments, and business.

Whether Islamic trading involves investing in gold, stocks, banking products or saving accounts, this article will examine the concept of halal investments, the principles of Islamic finance, and the applicability of Sharia law when it comes to trading, investing and operating within foreign exchange markets. 

Investment refers to the process of buying assets with the aim of the assets increasing in value over time. As the value of the asset increases, the investor is provided with a return that takes the form of capital gains or income payments. Investment has historically always been associated with the growth of wealth and the pursuit of capital income. However, investments can also be a means to improving lives and the lives of those in your community.

Investing becomes profitable when the asset you invest in increases in value and you are then able to sell it at a higher price. When the asset increases in value this is known as appreciation.

Investment can be complex and fraught with risk and technical difficulties. Add in the Sharia rules and the world of halal investment can seem increasingly daunting for Muslims. Sharia compliant trading and investments are those investments that do not breach the Sharia rules which are based on the idea of ethical investment and saving. Islamic finance principles relating to finances and investment are based on social justice, non-exploitation, and halal investments that lead to a mutually beneficial partnership.

 Halal investment refers to the investment of money in accordance with Islamic finance principles. Sharia finance law is centered on the concepts of social justice, ethics, and using finances to help build communities. For any Muslim considering halal investment strategies, the focus should be partnerships that are mutually financially beneficial.

Sharia law lays down principles and regulations Muslim investors must comply with if they want to invest in halal products. According to Sharia rules, compliance with Islamic finance principles leads to a more ethical and just society. This goes against the western notion that making money is the ultimate aim for investors. Whilst Islamic finance does not prohibit making money, it does place emphasis on ethics and justice, so that a balance is achieved between religion, family, life, intellect, and property.

Halal investments should not be dismissed by those wanting to generate income. Islamic finance is not restricting or limiting, it simply proposes ethical practices and mutual benefit. Halal investments encourage Muslims to invest responsibly and always ethically. It is still very possible to make money ethically with the right investments. 
Investing within Sharia compliant products can potentially reduce the risk for investors, and is one of the reasons that Islamic banks were able to withstand the economic collapse in 2008.

Islamic finance principles provide financial principles for Muslim investors to operate within to ensure that the financing and investment activities comply with Sharia law. Whilst the main principles of Islamic finance have been around for centuries, formal Islamic banking and finance was established in the 20th Century. As the global Muslim population continues to grow, so too does the demand for Islamic finance products and banking. The Islamic finance sector is increasing in size every year, with Islamic finance institutions overseeing over $2 trillion.

The core difference between traditional investment and Islamic investment is that Islamic finance principles dictate what investments are deemed to be halal or not. Islamic finance needs to comply strictly with Sharia law, and the following Islamic finance principles are expressly prohibited:

Interest payments, or investments that include an interest element, are strictly prohibited in Islam. Charging interest is not considered to be Sharia compliant as it is deemed to be an exploitative practice.

Sharia rules do not allow participating in contracts where there is excessive uncertainty or risks. Investing or partaking in any short-selling or uncertain contracts are forbidden in accordance with Islamic finance principles. 

For Muslim investors, investment in any business that is involved in prohibited activities such as gambling, and selling alcohol is prohibited.

Sharia law prohibits speculation or gambling. So, if any form of investing includes contracts where the ownership is dependent on events in the future that are uncertain, this is deemed to be precarious.

Riba is a key component when it comes to Islamic finance principles. For Muslim investors, riba plays a central role in the practice of Sharia compliant financial investing and saving. In Islamic finance terms, riba refers to the concept of interest, or usury and unjust gains made in the course of investment, trade and business. Riba is condemned in hadith and the Quran. Linguistically, riba refers to any 'increase' or growth, but the concept itself is rooted in the notion that riba distorts wealth as the money lender is able to exploit others and increase their wealth without any substantial contribution to society.

The concept of riba al-nasee'ah that refers to an increase in wealth due to the passage of time is one of the most common types of riba. Bonds fall into this category and are therefore not permissible for Muslim investors. The prohibition of riba is one of the reasons Muslim investors trading in the financial markets prefer stock investments over other forms of investing.

As the Muslim economy continues to increase year on year, the Islamic finance industry is also growing to cater for the need for growing halal investment options and products. Some of the main benefits of halal investments for Muslims (and no-Muslims) include the following:
  • Social Responsibility - taking a socially responsible approach to finances and investment not only means the investment is Sharia-compliant, but it can also lead to human rights protections, just distribution of wealth, and ethical investments that minimise environmental degradation.
  • Less Risk - Islamic finance principles mean that halal investment products are less susceptible to huge market changes and fluctuations. Global crises do not impact Islamic finance as they do more traditional banking. As short term speculation is discouraged in Islam, the exposure is much lower overall.
  • Growing wealth in a halal way - this is the most critical benefit for Muslim investors. Not only does halal investment mean that Muslims can engage and involve themselves with global markets, it also means that Muslims partake in disciplined investment that requires ethical due diligence.
As with any type of investment, there are risks alongside benefits. Whilst Islamic finance does not prohibit risk taking, it does discourage speculative investments. Some of the risks associated with halal investment include:
  • Limited opportunities - halal investment products are fairly new to the finance niche so finding the right opportunity can sometimes be challenging.
  • Due diligence - the level of information gathering required for halal investments is far greater than traditional investment. The due diligence takes time and requires attention to detail that not all investors are willing to do.
  • Diversification - investing in a halal way requires time and consideration. This often means that the portfolio is not as diverse, or quick to grow, as traditional investments.
Stocks, bonds and shares are the most common publicly traded investments. Stocks are essentially ownership shares of companies that have publicly traded. A stock is a share of the companies earnings and assets, owning one stock is equivalent to owning a part of the company. If the value of the company increases then the value of the stock increases at the same rate. Similarly, if the market value of the company decreases then so will the value of the stocks owned. Muslim investors who purchase stocks will want to know the modus operandi of the company so that they can be sure that any income derived from their stocks is Sharia compliant.

Bonds are ownership shares of debt, and are usually interest-bearing. This means that the bond effectively acts as a loan to the company. On the whole, bonds are not considered to be a Sharia compliant investment as they are rooted in interest payments. Sukuks are a more acceptable form of Islamic finance bond (see below).

In terms of investment, gold is considered a safe and traditional means of investment that is Sharia compliant. Gold often appreciates in value, is easy to obtain and invest in, and is not deemed to be in breach of any Islamic finance laws.

Sukuks are an alternative to traditional bonds as they do not bear any interest. They are often referred to as Islamic bonds, and are normally asset based. They are deemed to be conservative investments on the basis that they form part of the 'fixed income' market.

Sukuks are able to generate income for halal investors without breaching the Sharia rules.

Investing in property can be a great way for Muslims to invest. The only caveat is that if a mortgage is obtained it is deemed to be a halal mortgage without any element of riba.

Any halal investment must be in accordance with the Sharia principles mentioned above, and must be done with consideration of ethics and social justice. Companies whose main business goes against the central tenets of Islam are considered universally unacceptable as investment opportunities.

There are certain industries that are deemed to be unethical or at risk of causing harm to society, and Muslims should therefore avoid opportunities in these sectors:
  • Industries manufacturing, promoting, advertising, or selling alcohol
  • Industries manufacturing, promoting, advertising, or selling cigarettes or drugs
  • Banking products or financial transactions that include interest (riba)
  • Any industries related to gambling
  • Industries related to prostitution or pornography
  • Industries relating to pork
Sharia law prohibits investing in industries and businesses where at least 5% of their income comes from unethical sources (this is known as the 5% rule). Before investing in any business, Muslims should check out the financial statements and positioning of the company and do some research on their sources of income and profits and where they are derived from.

When undertaking due diligence prior to investing, you should consider the following 3 types of investing opportunities:
  1. Companies with halal practices - these are known as clean companies (from a halal investment perspective) and are companies that operate in a completely halal way. These companies operate within the Sharia finance rules, and have a clear halal audit trail.
  2. Companies with haram practices - these types of companies operate within prohibited industries such as gambling and alcohol.
  3. Mixed companies - these companies may have halal practices but these are mixed with haram practices or activities.
For halal investors, option 1 is always the best option as there is no overlap of the halal-haram considerations. Companies that have a cross-over between halal and haram should be avoided.

As one of the fastest growing finance sectors, Islamic finance has opened up many opportunities for halal investors. In the UK alone, there are many banks that offer specialist investing products, loans, and savings accounts.

Islamic finance promotes the concepts of ethical financial management and investment and reciprocal profits. The use of interest, risky investments, and unethical industry investment is discouraged. Halal investing is a growing financial niche, and it is available for Muslims and non-Muslims alike. Investing in products that are Sharia compliant is not difficult or impossible, it just requires some information gathering and due diligence.

Prominent private equity institutions like Gobi Partners have realised the growing demand for halal financial products. Over the last decade, more and more financial institutions and foreign exchange markets have taken steps to place themselves in the Islamic finance and private equity market. High net worth individuals in emerging markets such as Africa and the Middle East are entering the private equity investment market rapidly and this has led to an increase in demand for Sharia compliant investment opportunities. Islamic finance is no longer considered to be a niche and exotic sector within the banking industry.

Of course, the most important factor behind the growth of the Islamic finance industry is that Muslims make up almost a quarter of the world's population. The Muslim investor base is large and it is growing. This growth has not been lost on wealth managers and banks who are keen to tap into the wealth and investment funds in the hands of wealthy Muslims. Coupled with the economic expansion of many Muslim countries, it is likely that halal investment products will become more accessible within the next 10 years.

As the Islamic finance sector continues to grow annually, a faith-based approach to investing and trading is becoming more mainstream. However, the application of Islamic finance to investment products 
needs to be undertaken carefully and can be nuanced, so always make sure to check the financial information of any company you are considering investing in.  

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