Islamic Finance and Impact Investing

Halal Investments

When it comes to investing, many Muslims (and non-Muslim investors) are on the search for stocks and investment products that are deemed to be halal stocks. Halal stocks refer to those stocks that emanate from companies that comply with Sharia principles.Sharia rules about investment encourage investors to find a balance between the society and the individual. The foundation of halal investing rests on being socially responsible and making sure your investments comply with Sharia rules about what is halal and haram.In very basic terms, Sharia compliant stocks should :

1. be based on ethical profit sharing
2. prohibit interest
3. not be linked to prohibited activities and industries
4. uphold ethical values

Guidelines For Halal Investments

Halal investing requires investors to ensure their investment decisions are based on what is permissible under Sharia rules.

Any business that engages in so-called haram (non-permissible) activities should be avoided as the stocks will not be halal. For example, companies that are involved with alcohol, pork, gambling, porn, tobacco, and drugs are not permissible when it comes to investing or the purchase of stocks.

Instead, look for businesses that are involved in technology, science, energy, transport, education, regeneration, retail, property, and textiles.

Islamic finance-based investment activity requires the investors to evaluate where the stocks come from, the financial activities of the company, the price being paid, the financial statements and accounts, and the revenue/ sales generated. This level of research means once you are ready to invest you should know a great deal about the company.

Activities such as short-selling are not permissible by Sharia law.

CAN MUSLIMS INVEST IN STOCKS?

The simple answer to this question is yes. Muslins can invest in the stock market and stocks that are deemed to be compliant with Sharia principles.

From an Islamic perspective, as long as the stocks being invested in do not contravene any Islamic finance principles, then investing in them is considered permissible.

That is not to say that investing in all and any kind of stock is halal. Investors looking for halal stocks should be mindful of the companies and the industry they are investing in.

WHAT ARE HALAL STOCKS?

Halal stocks are stocks from companies that are compliant with Sharia principles relating to finance.

According to Islamic finance and Sharia laws, investors should share in profit and loss. Companies you invest in should not be linked to prohibited industries such as gambling and porn, and they should not trade unethically.

Muslims have a duty to ensure that they align their investment activities with Islamic finance principles.

ARE HALAL STOCKS ONLY FOR MUSLIMS?

No, halal stocks are not only for Muslim investors. In the United Kingdom and across the globe more and more investors are looking for more ethical stocks.

Halal stocks will normally fall within the realms of ethical investing given that Islamic finance is based on principles relating to social justice and ethics.

Many Sharia compliant lenders and providers of financial products in the UK offer halal stocks to Muslims and the wider investor community.

Halal Stocks - Factors To Consider

Halal stocks should be screened for Sharia compliance. You should look at the website of the company you intend to purchase stocks of, and check to see what their business operations entail. Further, examine their trading practices and their sources of income.

Before you invest your money, make sure to undertake quantitative and qualitative assessments and screenings of the company's business operations. You'd be surprised at what can contravene Sharia rules relating to business. For example, you might want to invest in a business that deals in the buying and selling of food such as fresh vegetable and fruit.

However, when looking closely, you might find the same company or brand also buys and sells alcohol and this is contravention of Sharia principles. Investing in such a company would not be deemed to be halal.

Another example of a prohibited stock would be investing in stocks belonging to a company that distributes food. On the surface, this might seem to be non-controversial, but if the company distributes all kinds of meat including pork, then the stocks of that company will not be deemed to be halal.

Also, companies whose finances revolve around interest-based activities should be avoided. Under Islamic finance principles, riba ( interest) is strictly prohibited. Any company you buy stocks from should not pay or receive interest in any form. Always check the position of companies you want to invest in by checking out the web page and the service they offer.

An important point to note is that investors in halal stocks should ensure that they keep track of their stocks. Do not assume that just because the stocks started off as halal that they will remain so. Many companies often change their policies and sometimes they can veer from being Sharia compliant, to non-compliant.

Always use trusted sources of information and undertake your own research on any company you want to invest in.

Do not be fooled by companies that are essentially mutton dressed as lamb. This refers to those companies that claim to be ethical and halal but are not. If you have any doubt about the stocks of a company then it is best to refrain from investing.The main things to look out for are as follows:

• Does the company trade ethically?
• Are their contractual terms fair and ethical?
• What industries is the company involved in?
• Does the company deal with any prohibited or haram products, services or practices?
• Are the company's finances linked to interest/ riba?
• Does the company partake in any activities which go against basic Islamic rules and principles?
• What is their business process? what economy do they trade in?
• Does the company have a high level of debt?

There are many products and services online that can help you carry out the compliancy screenings.

Benefits Of Investing In Halal Stocks

One of the main benefits of halal investing is that it encourages an ethical approach to investing and growing your portfolio. Halal investing requires you to undertake due diligence and research the companies you invest in. This leads to a more disciplined and considered approach when it comes to investing your money.

Short term speculation is discouraged under Sharia rules as it flies too close to speculative gambling. This means that your investments are less risky overall and have greater long-term success.

Muslim investors can sometimes find it hard to navigate the complicated investment landscape. Stocks that are Sharia compliant are not always readily available in the traditional bank setup investors might be used to. A great deal of screening is required before stocks can be deemed to be halal, but there are services out there that do all the due diligence for you.

As the Islamic finance market continues to gain momentum, Muslim investors are finding there is a greater choice when it comes to halal stocks.

Sharia-compliant finance operates within the Islamic finance financial model. What this means is that any financial product or service must adhere to Islamic rules relating to financial transactions.

The increasing popularity of Sharia-compliant finance is being driven by the growth in the global Islamic finance industry. However, many businesses and individuals are looking to Sharia-compliant finance to provide them with ethically based options and solutions. Ethical investors and the growing trend for socially responsible investing means Sharia compliant services are aligning with the values of many people across the world.

Sharia-Compliant Finance

Sharia-compliant finance must have the following qualities:

• Aligns with Islamic values
• Prohibition on interest/riba
• Ethics and morality screening
• Social responsibility
• Risk management
• Profit and loss sharing
• Ongoing monitoring and compliance
• Asset backed finance
• Avoiding speculation and ambiguity

Promoting Inclusion

Sharia-compliant finance is a great draw for ethical investors in the market looking to invest their money in ethical enterprises that promote individual inclusion and diversity. By providing equitable access to financial services, Sharia-compliant finance serves underprivileged communities who may not previously had access to products and services.

The focus on building inclusion and equity through transparency, information, and sharing of profits enables Sharia-compliant finance to promote inclusion.

There are several ways in which Sharia-compliant finance promotes inclusion.

• Prohibition of interest: the charging or receiving of interest is seen in Islam as an exploitative practice that is unjust and unfair.
• Avoiding speculation: keeping transactions transparent and equal makes them more inclusive.
• Ethical investment screening: screening for industries such as gambling and alcohol means that more focus is placed on environmental, social, and corporate governance.
• Asset backed finance: having transactions backed by assets leads to more clarity and equity between all parties.
• Risk sharing: this leads to greater inclusion as it removes the respective power of each party when coming into the financial deal. It also means that payments owing to the parties are fair and proportionate.
• Socially responsible investing: the onus on being socially responsible when investing or managing a portfolio places a responsibility on the investor to be conscious of working with marginalised groups.
• Sustainability: having a future focus on long term goals is a key element of Islamic finance.
• Fairness in contracts: Islamic finance emphasises the importance of having fair contracts and contract terms. Parties to a contract should act with integrity, honesty, and mutual consent.

Microfinance In Islamic Finance

Islamic finance recognises the importance of supporting small and medium businesses. Investment in these sectors and industries is encouraged.

Sharia-compliant finance understands that microfinance for small businesses is imperative for growth and sustainability. Often, small businesses can struggle to secure funding and capital. Islamic microfinance offers SMEs a lifeline with Sharia compliant finance solutions that are tailored to the business needs.

For investors, it means they can invest ethically, enabling entrepreneurs to access capital for business growth.

Risk And Profit Sharing

Risk and profit sharing is a key element of Islamic finance. What it means in principle is that partnership models such as Mudarabah and Musharakah are encouraged.

These partnerships enable entrepreneurs and financiers to agree on the terms of any profit sharing in a fair and transparent way.

Community Development Initiatives

Islamic finance encourages community development initiatives through mechanisms that align with Islam. The central principles of social responsibility and ethical investing mean that investors are required to act in a philanthropic way for the greater good of society. The outcome is that society benefits from the actions of the individual.

Sharia-compliant investments are directed towards the type of fund and project that positively impacts society. Investors looking for Sharia compliant investors prioritise investments in sectors that require funding such as healthcare, education, renewable energy, housing, and poverty alleviation.

These sectors have seen huge growth in recent years, so investing in them is often a win for the socially conscious investor and the initiative.

Staying Stable In Volatile Markets

Sharia compliant finance has demonstrated resilience and stability in volatile markets. This is due to its core principles of risk sharing, asset backed finance, and avoiding interest. Ethical investors are not looking for a quick and easy return, instead they want to invest in a stable and ethical sector.

As changes in interest rates affected the global markets in recent years, the Islamic finance investment market remained relatively stable as it is not dependent on interest backed lending or borrowing.

The value of the assets the finance is backed against provides some stability when the market becomes unpredictable.

Global Growth

Islam encourages a long term approach when it comes to investments. The focus is not on immediate profits, but long term sustainability and societal benefit. The principles of sabr (patience) and fairness in Islam mean that ethical investors investing using a Sharia-compliant framework are not always looking for an immediate return on investment. The aim is long term benefits and stable returns.

As the Islamic finance industry continues to grow, so too do the Sharia compliant finance options. Ethical investors from all backgrounds are pushing the drive for ethical and socially responsible investments.

Islamic car finance is available for Muslims wanting Sharia compliant options. What halal finance options do Muslims have and how do they work?

There is a huge array of car financing and leasing options on the market for those who do not want to buy a car outright. For Muslims, the car finance options available can be difficult to navigate, especially if they want finance and leasing options that are not in contravention of Islamic finance options.

Islamic car finance operates to enable people to use their money wisely, spread the actual cost of financing the car whilst ensuring that they do not pay interest on the finance option they have chosen. Drivers can take advantage of car finance deals whilst also adhering to Islamic Sharia rules relating to interest (the payment and receipt of which is prohibited) and speculation.

The halal car finance market is aimed at those people who want Sharia compliant finance options. Essentially, for those people who do not have the cash to buy a car outright, or those who do not want to buy a car paying cash, Islamic finance ensures that people can spread the cost of the car without breaching Sharia rules.

Islamic Finance Principles Applied To Car Finance

The main Islamic finance principles relating to car finance are:

1. Riba (Interest) - Islam prohibits the receipt or payment of interest. It is deemed to be haram. In car finance terms, this means that Muslims who want to remain Sharia compliant cannot borrow funds with an Annual Percentage Rate (APR) attached. An APR is an interest rate and is prohibited in Islam.
2. Simplicity of Contracts: Islamic Sharia principles dictate that transactions should always be honest, transparent and open. This means that if you enter into a contract for leasing a car you should make sure that there is no undue risk, speculation, or gambling involved. The contract should be fair for both parties and be simple to interpret.

Buying A Car Outright Without Car Finance

It goes without saying that buying a car outright with a cash payment is probably the best option for those wanting to remain strictly Sharia compliant. If you have savings that would cover the purchase of the car you can avoid interest payments and APR. However, not all Muslims have the option of paying cash outright for a car and this is where the market has developed to cater to the needs of those wanting Sharia compliant car finance options.

Car Finance Options - Leasing

Islam does not prohibit leasing (ijara). In fact, leasing is permissible and is compatible with Islamic finance principles. Payments for vehicles can be done via leasing contracts with car companies. Sharia does not prohibit car leasing agreements because the heart of the transaction relates to a tangible asset - the car. As long as the leasing contract sets out the terms of the lease, the details of the parties, and the payments it can be structured to be compliant with Islamic finance rules.HOW DOES HALAL CAR FINANCE WORK?

Halal car finance is actually straightforward, working on the basis of a loan being agreed between the parties. The buyer and seller in the transaction agree on the value of the car the seller is selling. The seller does not charge an interest rate for payment of the car as they would normally to make money on the finance arrangement. Instead, the seller increases the purchase price of the car to cover the interest payments they would have received. No interest is actually charged by a bank or the seller.

What this means for the buyer is that the deposit will be higher than a deposit they would pay on a non-halal car finance option, but for Muslims this is a halal way of obtaining car finance.

Halal Car Finance Options

Generally speaking, the traditional car finance options such as hire purchase agreement and personal contracts are always attached to an APR and this makes them non compliant with Sharia rules.

However, below is an example of how Islamic finance options can adapt the traditional car finance options to make them halal.

Hire Purchase Agreement (Hp)

HP financing means the buyer can spread the cost of the car over fixed monthly payments and the use of a deposit. Below is an example of an Islamic finance HP deal:

Example:

Price: £20,000

Contract Term: 12 months

APR: 6%

Total Cost to buyer: £21,200

Using an Islamic finance agreement, the seller/dealer would add the additional £1,200 to the price of the car. The buyer of the car would then pay £21,200 as fixed payments monthly for the contract term. When all the payments have been made, the buyer owns the car outright.

Personal Contract Purchase (Pcp)

PCP's are a common form of car financing option and act as a loan, with the buyer only paying off the full value of the car at the end of the contract term if they decide to keep the car. If the buyer does not pay off the full value of the car then they do not own the car at the end of the contract. PCP's usually always come with interest payments and are therefore not Sharia compliant.

However, there are sometimes some PCP finance deals available for new cars but these can be expensive and the requirements are often stringent.

Personal Contact Hire (Pch)

As PCH agreements are actually long-term hiring agreements they are normally deemed to be Sharia compliant. As you are simply renting the car from the owner or dealer you are simply paying for the use of the car for a specific duration.

Conclusion

Each contract and hire purchase agreement is different. The onus is on the customer to ensure that they have inspected the terms, and service fees of the agreement before they decide whether the option is Sharia compliant. There are various Islamic car finance options on the market these days, so it is always best to explore these options rather than using the traditional bank or dealer car finance options.