Halal investments FAQ

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. In this article we're trying to answer the main questions regarding halal investments.

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.

WHAT IS SHARIAH COMPLIANT OR HALAL INVESTING?

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.

PAYING AND CHARGING INTEREST (RIBA)

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.

RISK AND UNCERTAINTY (GHARAR)

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.

INVESTING IN PROHIBITED ACTIVITIES

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

SPECULATION (MAISIR)

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.

BENEFITS OF HALAL INVESTMENTS

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.

CONS OF HALAL INVESTMENTS

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.

PROHIBITED INDUSTRIES

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.

WHAT TO LOOK FOR IN HALAL INVESTMENT

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.

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.

Allah knows best!