Investing in certain stocks and industries is prohibited in Islamic teachings. According to the principles applied by Islamic law or the ‘Shariah’ it is also known, receiving interest on money lent is forbidden for a Muslim. This begs the question, “Is there a halal way of investing money?”
Islamic investments do exist. This form of finance allows you to make an investment that aligns with your faith as a Muslim. The patterns created by Muslim scholars encourage you to invest in a way, which is obedient with the Sharia Law.
There are some investment factors that are extracted from the regulations of Shariah law, which empower you to avail an investment opportunity, without acquiring any form of interest. The Shariah principles of financial investment are built on the notion that you can earn a reward, after participating in a risk sharing opportunity or proposition. An agreement between the financier and customer is made in regards to sharing of the risk. Similarly, the profits from the venture are distributed to all parties on the basis of risk taken. In accordance with the principles of Islamic law of finance, individuals are prohibited from developing new financial risks to generate a profit. In fact, the law is engineered to safeguard the interest of all parties against fraudulent activities.
Considering this, it is imperative for practising Muslims to employ Shariah ways of investing money. If you are concerned about finding Shariah investment opportunities in the UK, you can refer to the ensuing guide.
What is Halal or Shariah Compliant Investing?
Halal or Shariah Compliant investing is the investing of money, in accordance with the principles set aside by Islamic Law. The regulations of the Shariah law revolve around the idea of ethically using your finances to strengthen the bonds within the Muslim community. Hence, halal investment strategies aim to achieve a mutually beneficial partnership. The Shariah or Islamic law relating to finance revolves around three basic factors:
Evasion from interest (Riba)
The principles of Shariah Law urge Muslims to take part in investment opportunities, without expecting interest in return. This suggests that if you invest in a stock or a business, you must lend the money with the intention to help the business, without hoping to make a profit from the situation in any case. The absence of interest is usually enforced so that the Muslim community can effectively sustain the brotherhood and assist each other in times of financial struggle. Essentially, the Shariah investment offers mutual benefits. The business benefits, as you are able to provide the financial incentives that are necessary to instate its operations, while you profit as the business grows strength to strength. This form of investment fosters solidarity within the Muslim community.
Avoidance of Unethical Investments
Considering the objectives of the Shariah law, Muslims are asked to refrain themselves from investing in areas that can be potentially harmful to society, as a whole. The list of unethical investments may include items that are haram (unlawful), as well as those items which are halal (lawful). For instance, according to the Shariah Law, Tobacco is not entirely considered unlawful, however, it is considered to be Makruh or disliked. Keeping this in mind, the Shariah law discourages individuals to invest in the Tobacco industry, as it plays a significant role in damaging the health of individuals.
The Five Percent (5%) Rule
The Shariah principles related to investment further encourage individuals to avoid investing in businesses that generate at least 5% of its income from unethical sources. Considering this, you are required to thoroughly review the operations of each business, before deciding to invest in it. This way, you can follow your faith as a Muslim, as well as being an ethical member of the community.
Shariah Compliant Investment Guidelines
As stated earlier, the Shariah rules relating to investment opportunities mandate the Muslim to abide by certain regulations. The enforcement of these rule is a necessary initiative, in order to create a flourishing and ethical society. The Shariah Compliant Investment rules aim to maintain a balance between the five subdivisions: religion, life, intellect, family, and property. The guidelines of the Shariah Compliant Investment are as follows:
The most important factor in Shariah Compliant Investment is the liberation from Riba or interest. Hence, it is imperative to stay away from investment opportunities that involve the acquisition or earning of interest.
Essentially, all investments made in accordance with the Shariah law must be carried out after taking ethical principles into account. This suggests that you must avoid investing in companies or businesses that are engaged in unethical ventures. Additionally, it is further required for you to be honest and transparent in all your transactions. You must avoid activities involving fraud, while also ensuring that you do not harm the business, in any way.
Islamic law prohibits you from investing in the following industries.
According to Islamic regulations, the consumption of Alcohol is considered haram or unlawful. Therefore, making an investment in this industry can further lead to the manufacturing of a product that promotes sinful or unlawful acts. As a result, you must avoid any financial transactions involving investing, buying or selling alcohol, or alcohol-infused products.
Banks (in cases of usury)
Investing in a bank is also considered to be unlawful, in the case that the bank is engaged in the practice of usury or sood. This point is debated readily by Islamic Scholars; however, the mutual decision is usually to avoid investing in banks that operate using interest. Although, you can invest in Islamic banks to avoid usury.
The conventional method of insurance is also forbidden in the principles of Islamic Law. This is because there is a level of uncertainty involved in the conventional model of paying insurance. In addition to this, the traditional insurance companies operate by charging interest on their reimbursement. Hence, this method is prohibited in Islam.
Gambling, being haram (unlawful), is prohibited in accordance with the regulations of Shariah Law. Considering this, you must avoid placing your money in lottery tickets, casinos, investing in betting companies or other businesses which involve any form of gambling.
Investing in the creation, distribution and subscription of pornographic industries is considered unlawful. Additionally, investing in a business that generates its income via pornographic means is also prohibited.
While tobacco is not haram, it is a leading cause of lung cancer and other health-related issues. Keeping this in mind, you are required to avoid investing in this industry.
Halal Investment Options
There are several Halal investments options that you can choose to invest your savings in. However, before you decide to invest, it is important to carry out comprehensive research regarding the business you are willing to place your money into. If you are in the search for a halal way of making money, you can consider the following options:
Ethical investment opportunities involve companies and businesses that hold the objective of making a positive social change. When it comes to purchasing ethical stocks, you are required to take the nature of the company’s business activities into account as well. Firms that provide ethical investment opportunities carry out comprehensive screening measures, so they enlist companies that meet the criteria. For instance, a company dealing with the preservation of environmental resources can be considered as an ethical investment opportunity.
Keeping this in mind, you can purchase shares and enjoy dividends from that company, to generate an interest-free income. This way, you can make a profit off of your investments while also making sure that you abide by the Shariah law.
Investing in properties is a halal way of generating income. Property investments can range from buying and selling houses, lands and apartments, that you could either sell for a reasonable profit or rent out to generate a monthly income.
If you are looking for a long-term investment opportunity, you can invest in shares in the stock market. You can consider the list of companies listed on the stock exchange, and purchase shares in a firm that you deem reliable.
You can also invest in a company’s funds. There are several companies that run halal funds that abide by the regulations of Shariah law. Considering this, you would need to do a little bit of research to ensure that the selected fund is certified to be Shariah-Compliant.
Investing in a start-up comes with a high-risk. There is a strong chance that you might invest in a company that fails to be successful. However, if you invest in the right company, with a fail-proof business plan, you can generate a large reward. For instance, when Uber started out, investors placed an amount as little as £5,000. When the company floated, that amount turned into £25 million.
To find start-ups, you can look into the various online platforms that list start-ups, such as Seedr. You can review the start-ups business plan to make an educated decision regarding your investment.
Gold is one of the safest categories of investment. The prices of gold are always on the rise, due to its high demand. Additionally, gold is traditional, easy to obtain and always required for important events, such as Muslim weddings. Therefore, if you have some money set aside for investment purposes, you can buy a gold bar, that could be sold at a later date, when the gold prices rise.
A Sukuk is an Islamic certificate, quite similar to the concept of a bond. However, Sukuks are compliant with the regulations of Shariah. Sukuks provide a fixed-income result, hence your purchase brings out consistent results instead of a drastic splurge of growth.
Shariah Compliant Banking Options
Placing your money in a contemporary bank may not follow the rules of Shariah. In fact, most banks operate using interest, which is entirely forbidden in Shariah law. Therefore, you must choose a bank whose objectives are aligned with that of Islamic Law.
Al Rayan Bank
Al Rayan Bank is an Islamic financial institution in the UK that abides with the laws of Shariah. You can open a savings account without gaining or dealing with interest. Islamic banking is a safer option, in contrast to traditional banking, as you are provided with the satisfaction of knowing that your money is not being contributed to any unethical activities. For instance, if you choose to open a savings account in a traditional bank, your money could still be involved in unethical activities. Considering this, choosing an Islamic bank is an ideal option. Al Rayan Bank has five branches, and several offices located across the UK.
UBL UK also extends Islamic banking options to its customers. It deals with interest-free services and provides financial advisors, who are well-versed in the Shariah Law. With UBL UK, you can open up a savings account that follows the regulatory principles of ‘Modaraba’. You can place your funds with the bank, and the financial advisor can guide on the next steps. Once the profit is generated from the Shariah-compliant investments, it can be distributed among the depositors. This way, the notion of interest is avoided entirely.
Halal investment funds
Wahed Invest is similar to a traditional brokerage firm or a financial advisor. The platform enables you to invest your money across a magnitude of funds to diversify your portfolio. It is a Shariah-compliant firm that follows the basic principles of Islamic law. You can invest in global stocks, gold, emerging markets and Sukuk. Wahed Invest offers a variety of portfolio approaches, including the following:
The very aggressive investment portfolio offers a high-risk and high-return investment strategy. It follows the ensuing pattern:
- Global stocks: 85%
- Emerging market stocks: 10%
- Sukuk: 0%
- Gold: 3.75%
- Cash: 1.25%
The aggressive portfolio offers a certain degree of risk, while also offering a relatively high return. It mostly comprises of equities, whose values are altered on a day to day basis. Consider the following numbers:
- Global stocks: 60.25%
- Emerging market stocks: 10.00%
- Sukuk: 16.00%
- Cash: 1.25%
The moderately aggressive option also involves relatively less significant risks. In this model, the asset allocation is distributed practically equally between fixed-income securities and equities. The moderately aggressive portfolio, offered by Wahed Investment, is as follows:
- Global stocks: 42.50%
- Emerging market stocks: 10.00%
- Sukuk: 33.75%
- Gold: 12.50%
- Cash: 1.25%
In a moderate portfolio, there is a medium level of risk and reward. The moderate portfolio allocates the assets in an ensuing way:
- Global stocks: 24.25%
- Emerging market stocks: 9.50%
- Sukuk: 55.00%
- Gold: 10.00%
- Cash: 1.25%
A moderately conservative portfolio is ideal for you if you are risk adverse and do not want too much risk, while still taking some risks to protect yourself from inflation. In Wahed Investment, the assets are allocated in the following ways:
- Global stocks: 12.75%
- Emerging market stocks: 3.50%
- Sukuk: 75.00%
- Gold: 7.50%
- Cash: 1.25%
The very conservative portfolio model offers low-risk security. With this portfolio, you can avoid investing in areas where there is a high-risk factor, such as the stock market. Wahid Investment offers the following:
- Global stocks: 0.00%
- Emerging market stocks: 0.00%
- Sukuk: 92.50%
- Gold: 5.00%
- Cash: 2.50%
Sukuk v Conventional Bonds
Sukuk is considered as the Shariah alternative to a typical bond. However, there are several differences between the two. As Sukuk follows the regulations of Islamic law, it completely avoids interest (riba). Any asset being supported by Sukuk is bound by rules and regulations of Shariah law, whereas a bond involves interest and may deal with non-shariah activities.
Additionally, Sukuk revolves around the idea of owning assets, whereas bonds are created to function as a debt obligation. In this case, if the assets supporting the Sukuk increase in value, the value of Sukuk will naturally arise. On the other hand, in case of a bond, you can only earn a profit through its interest.
Similarly, the value of Sukuk is determined by the worth of assets that it is backing. Conversely, in the case of a bond, the worth and price of a bond are decided by considering the credit rating of a bond.
The halal way of investing encourages the idea of ethical and reciprocal profits. It prohibits the use of interest, unethical industries, transactions and any investment opportunities that could cause harm in the society. If you wish to invest in accordance with the principles of Shariah law, you can consider the aforementioned tips. You don’t have to be a Muslim to invest ethically. Practising the Shariah principles is not as difficult as it seems, all you need is to take a few extra steps to ensure that you are following Islamic principles. You can research your options, choose the best investment plan for yourself and invest wisely!