Halal Investment Oppotunities

WHAT IS A HALAL INVESTMENT?

Halal investment opportunities are also known as Sharia compliant investments. Muslims across the globe have been keen to invest in halal investment products that do not contravene Islamic principles relating to investment.

As the Islamic finance industry continues to grow to meet the demand from discerning Muslims, so too has the market for halal investments grown.

Not only has the halal investment industry gained investment from individuals, but it has also caught the attention of many large private equity institutions.

EXAMPLES OF HALAL INVESTMENTS

There are a variety of financial instruments that fall within the halal investment category. These include investment in the following:

• Real estate
• Gold
• Islamic unit trusts
• Islamic mutual funds
• Stocks 
• Venture capital
• Sharia compliant stocks
• Islamic sukuks

These halal investment opportunities are managed by financial organisations that specialise in, and have in depth knowledge of, Sharia compliant investments.

For example, the UK stock market has a variety of Sharia compliant stocks suitable for halal investment. The industries that are involved include pharmaceuticals, renewable energy, pensions, and technology.

Sharia compliant stocks can be purchased through indices including the FTSE Sharia Global Equity Index.

Alternatively, those looking for halal investment opportunities can go via brokers and financial advisors who specialise in Islamic finance and halal investing.

KEY ISLAMIC PRINCIPLES OF HALAL INVESTMENT

There are some key principles relating to halal investment that need to be considered and adhered to before any investment can be deemed to be halal:

• No investment activity can involve any form of interest (riba).
• Interest is a form of usury and is strictly prohibited under Islamic finance rules.
• Any form of investment instrument that includes interest is not permissible.
• The division of profit should be equitable between the parties. The profit and loss sharing elements of the investment should be based on a joint venture structure. No one party to the transaction should have an excessive benefit.
• Investment activities must stay clear of haram industries such as the pornography, gambling, alcohol, and pork industries.
• Investments should not be speculative or uncertain (gharar). Uncertainty in investments goes against the Islamic finance notion of fairness and transparency between the parties. This means that investment activities such as options and futures are prohibited.
• Investments should be socially responsible (more on that below).
• Investments should operate within a real and functional economy.

ISLAMIC FINANCE AND SOCIAL RESPONSIBILITY

Halal investments should always prioritise and implement investments that are ethical and socially responsible.

What this means is that investments should not adversely impact society (hence the reason why investment in haram industries is prohibited). Socially responsible investment is incumbent on halal investors based on Islam's commitment to sustainability and upholding moral and ethical standards.

Under Sharia rules, socially responsible investment promotes ethical, social and environmental considerations. The focus of investment should be to support communities and projects.

SOCIALLY RESPONSIBLE HALAL INVESTMENTS

The following are examples of socially responsible investments:

• Fair trade enterprises 
• Renewable energy
• Environmental projects
• Waste reduction
• Healthcare
• Education
• Affordable housing
• Social welfare projects
• Community development

When looking to see if an investment is socially responsible, it is not enough to simply look at the end investment goal. You need to also examine the governance involved, the level of transparency, and the responsibility of the management. 

CONVENTIONAL INVESTMENTS VS HALAL INVESTMENTS

The main difference between conventional investment and halal investment has been explained. Sharia compliant investment opportunities differ from conventional investments mainly because any interest-based activity is not permitted.

In addition to the no-interest rule, conventional investments tend to be debt and leverage based. Islamic investment is more focused on accounting and profits being passed through to investors.

In conventional bonds for example, the investor is often the lender and not the owner of the asset. Islamic investment is ownership based.

When it comes to risk sharing, conventional investments tend to have an imbalanced allocation of risk. In halal investment, the risk is shared more equitably between the parties.

HALAL INVESTMENTS SCREENING

For anyone with money to invest in a Sharia compliant way, via halal business opportunities, it is imperative that some form of screening takes place. Investors should look for information that demonstrates the investment is halal and provides halal value.

It is not enough if an investment simply invests in halal opportunities (ie, affordable housing) if the other investors in the project are companies involved in haram industries.

For example, if a brewery invests in a socially responsible project, this does not make the investment halal.

Halal investment requires screening so that the following can be eliminated:

• Stocks that are based on interest/ riba
• Stocks or companies/ businesses with high levels of debt
• Any haram business or product
• Mismanagement or poor corporate governance
• Exploitation within society
• Poor distribution of wealth and profits
• Poor performance when it comes to demonstrating ethical adherence. 

Halal investment is not always straightforward, the return on investment is not always as linear as you would expect. This is why you need to due your due diligence and speak to experts in halal investments before investing.

A good Islamic financial advisor will be able to screen the investment opportunity and confirm if it is, indeed, halal.

HALAL INVESTMENT - THE GROWING APPEAL

So, what is driving the appeal and growth of halal investment opportunities? Aside from the fact that Islam is the fastest growing religion in the world, leading to more and more Muslims looking to invest, investment companies are looking for more ethical and socially responsible forms of investing.

Islamic finance principles include consideration of environmental, social, and corporate governance factors. All of this takes place under the umbrella of socially responsible investing.

For Muslims and socially responsible investors who want to build assets and a pension pot, halal investment opportunities are on the increase.

BENEFITS OF HALAL INVESTMENT OPPORTUNITIES 

Some of the benefits of halal investing include:

• Adherence to Sharia rules relating to financial transactions and investments.
• Being able to create a diverse investment portfolio.
• Investing in a socially responsible and ethical manner
• Greater stability of assets and investments long-term
• Opportunities for greater return on investment based on the stability of investments that are not dependent on interest rate increases due to global events.