Is Investing Haram
Thomas
Funds, including mutual funds, ETFs and index funds are allowed as long as they match up with halal principles. It can be challenging to find funds in which all the components are halal, but there are shariah-compliant funds out there to simplify the selection process.
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In its simplest form, investing is the process of buying assets and selling them on for a higher price when they grow in value. For example, buying a home could be seen as an investment, as house prices have traditionally risen over time.
Buying and selling cryptocurrencies like Bitcoin is usually considered haram. Crypto is still in its infancy, making it a high risk investment within a volatile market. Some scholars have compared crypto investments to gambling.
In the UK, house prices have been rising steadily since the 2008 financial crisis. So many home buyers who look at property as a long-term investment get a positive financial return on their purchase. Find out about getting a Sharia-compliant mortgage to enable you to buy a home in the UK.
Buying physical items that tend to increase in value over time is another way to make halal investments. This could include gold, art, collectibles, classic cars, or any other halal goods that have high trading value.
Sukuk is a type of Sharia-compliant bond. Unlike traditional bonds, which involve loaning money (and therefore incurring debts and generating interest), sukuk investments generate profit from their underlying assets. So you can safely invest in these bonds without compromising your beliefs.
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Muslims have a problem when it comes to investing their wealth. There are too few investment products out there that cater to their specific needs. As a result, when thinking about long-term investments (such as pensions), most of my Muslim family and friends do one of three things:
The other drawback of depositing money in an Islamic savings account or term deposit is that you get a low rate of profit. At current market rates, you are typically earning 5% for a 12 month deposit which is below the current rate of inflation.
The big advantage of tucking your money away in a regulated bank is you are protected by the Financial Services Compensation Scheme: in the UK, up to 85,000 of your bank deposits are insured if the bank becomes insolvent. In the US, the protection is even higher: the FDIC provides deposit insurance of $250,000 in the event of bank failure.
Is this a good thing? Well, yes and no. We make good returns, whether out of rental income or from selling the property in a rising market. We have something real to fall back on if we need to use it or liquidate it.
You will note I have not mentioned sukuk (Islamic bonds). Pension fund managers will tell you that a balanced pension portfolio must incorporate bonds, which are interest-bearing debt instruments typically listed on an exchange. Bonds generate an ongoing income. Bond holders are effectively lending money to a company, earning a regular interest payment, and then getting 100% of their capital back when the loan matures. If the company goes bankrupt, bond holders tend to get most of their money back before other investors in the company. A nice way to earn a low-risk passive income.
Obviously bonds are haram because they are a type of interest-bearing loan. Muslims believe Allah wages war on those who devour riba (interest). When lending with interest proliferates in society, the rich become richer merely through the act of owning money, and societal inequality rises.
PPNs have tightly managed risks, are listed on an international exchange and are Shari'a compliant. For medium-sized, high growth companies seeking working capital finance, PPNs represent a unique method of accessing the international capital markets without the restrictions of bank debt, without diluting equity and without the high costs of listing on an exchange.
This is an industry gamechanger that will become the go-to method for financing the real economy. It not only addresses an enormous multi-trillion dollar gap in the supply of working capital to international companies but also a massive unrealised demand from investors seeking truly halal, high quality, repeatable income at very attractive yields.
While 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. The principles outlined to achieve Sharia-compliant investments include:
Islamic law prohibits the charging or paying of interest, as it is seen as exploitative. Therefore, halal investing avoids investments in companies that deal with interest-based products, such as conventional banking and insurance.
Halal investing places a strong emphasis on investing in businesses that have a positive impact on society, such as those that promote sustainable development, support local communities and uphold human rights.
Investing in Sharia-compliant assets is neither difficult nor impossible. It only requires some research and commitment to identify the appropriate investments. While this can be done by making use of halal screening resources, there are some widely accepted investments including:
- Gold - 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.
- Sukuk - Sukuk is an alternative to traditional bonds as they are not debt based and do not bear any interest. They are often referred to as Islamic bonds and are normally asset based. Sukuks are able to generate income for halal investors without breaching the Sharia rules.
- Social Responsibility- A socially responsible approach to finance and investment means that assets are deployed to benefit society. This leads to enhanced protection of human rights, just distribution of wealth, and conscious ethical investments that minimize environmental degradation.
- Less Exposure to Risk - Halal investment products are less susceptible to massive shocks in the market due to the de-linkage from riba. This reduces the investors' economic vulnerability.
- Growing wealth in an ethical way- Halal investments ensure Muslims can engage and involve themselves with globally permitted opportunities while maintaining their ethical and moral bounds.
With Ndovu, you can easily access Halal Funds from the comfort of your home. Whether you are a Muslim investor looking to invest in a way that reflects your faith, or a non-Muslim investor interested in socially responsible investing, through Ndovu, you can build a personalized portfolio and an investment plan that works just for you that can help grow your wealth in accordance with Islamic finance principles.
Some companies offer what is called a Self-Directed Brokerage Account (SDBA). This option allows you to customize your 401(k) by giving you the flexibility to choose your own investments. You will have to reach out to HR to find out if this option is offered. If it's available to you, just ask them to set it up.
Most of the default options offered in your 401(k) are going to be stock/bond ETFs or mutual funds and are only going to list the top 10 holdings within the fund out of potentially hundreds of holdings. This is what makes it difficult to go through each stock in the fund.
This Vanguard fund tracks the S&P 500 index which consists of the top 500 companies in the US. Any ETF or mutual fund that tracks the index will include those companies found within the index. According to Zoya, approximately 31% of the fund consists of companies that do not pass shariah compliance.
This fund by Vanguard consists only of companies with growth characteristics from the S&P 500 index. According to Zoya, approximately 12% of the fund holdings are non-compliant which makes it a much better option when compared to VOO.
While investing in a fund with the least amount of impermissible holdings is a viable option, it should only be treated as a temporary fix and you should think about moving to a more ideal situation very quickly.
As you may know, the SDBA option will allow employees to participate in [company name] 401(k) plan and will provide them the flexibility to choose their own investment options. This would be an ideal situation for [company name] Muslim employees because we can choose the halal investment options that work for us. [If your company has a diversity & inclusion statement/mission, appeal to it here]. As part of [company name] commitment to [include quote from diversity & inclusion statement], providing the SDBA option will allow your Muslim employees to feel included, supported, and accommodated, as they will not need to sacrifice their religious beliefs to participate in and benefit from their retirement benefits.
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