Halal investing has been a great concern for Muslims in recent years. As a Muslim investor, you may frequently question, “Are my sources of revenue Halal?” Many people, including Muslims, equate the term Halal exclusively with food. That is not always the case; numerous other parts of life must also be considered.
Take the following hadith into consideration:
“On the authority of Abu Huraira (RA) the Messenger of Allah (SAW) said:
If anyone amasses wealth through haram means and then gives charity from it, there is no regard for him and the burden of sin remains.” [Sahih Ibn Khuzaymah (4/110) No. 2471]
For Muslim investors, it is critical to ensure that their revenues are halal. Earnings include not just salaries and business revenue, but also income from halal investments.
What is halal investing?
According to Islamic religious principles, Shariah’s objective is to safeguard and maintain five spheres of existence: religion, life, intellect, family, and property.
Through Shariah’s rules, a balanced ecosystem of social obligation is built between society and the individual. While individuals are not restricted from pursuing self-interest, they are expected to do so without disregarding the interests of others.
Thus, by design, the Shariah is intended to regulate a harmonious relationship between the individual and society.
The six tenets of Shariah-compliant or Halal investment are as follows:
- A successful and functional relationship with the real economy
- Prohibition of riba (unjust, exploitative profits)
- Gambling prohibition
- Investing exclusively in legitimate activities
- Upholding of ethical and moral standards at all times·
- A successful and functional relationship with the real economy
Observe these three simple guidelines:
1. Recognise your investment objective.
Are you planning to invest in the long or short term? How risk-averse are you? Responding to these questions is critical since it will influence all future choices. For example, if you have a higher tolerance for risk, you may like to concentrate your investments on specific asset classes such as stocks and shares. On the other side, a risk-averse disposition may lead you to gold or Sukuk (Islamic bonds).
2. Period of time
How quickly do you require access to your cash? Your risk tolerance should be adjusted based on your objectives and available time.
For instance, real estate demands a significant quantity of cash. If you’re willing to wait, a market drop after your purchase may not be as worrying. If, on the other hand, you want to do a quick turnaround and the market crashes, you’ll be left exposed with your money attached to an asset that will make you a loss unless you are willing to wait until conditions improve.
3. Maintain a healthy balance.
It’s critical to diversify both assets and risk types to avoid being exposed to not only losses but also missed opportunities.
For instance, you might be really conservative and keep your money in an Islamic savings account – but you would miss out on potential gains in other asset classes and would almost certainly lose money overall due to the high rate of inflation. At the same time, investing your entire portfolio in stocks is an aggressive strategy that is only suitable for certain individuals.
What are some halal investment strategies?
There are four frequently used halal investment vehicles: stocks, companies, real estate, and cash.
Stocks – sometimes referred to as publicly listed company shares – are the most popular investment vehicle for Muslims.
It is critical for Muslim investors to locate halal equities and ETFs in order to begin halal stock trading without violating their principles.
Pros: Stocks expose investors to a diverse range of business sizes and types. They are liquid, allowing investors to deposit and withdraw funds within a short period of time.
Cons: Stocks are considered a higher-risk investment due to their volatility – as seen by the NASDAQ’s 78 percent decline in 2000-02 and the DJIA’s 50% decline in 2007-09. Few stocks pay dividends and those that do often do so at a rate substantially below inflation.
Shariah compliance: Many Muslims purchase stocks unaware that the shares they are purchasing may not be Shariah-compliant. Significant time must be devoted to screening each firm’s stock for Shariah compliance and monitoring the company and its activities on a continuous basis to guarantee that they remain Shariah-compliant.
Direct ownership of businesses may be a less popular financial choice for Muslims. An individual can either manage the entire firm on their own or in partnership with a group of investors.
Pros: The potential rewards are substantial, and you retain complete management of your firm.
Cons: Requires the commitment of substantial time and knowledge to remain competitive in the industry.
Business ownership is unquestionably one of the riskiest investment options available to investors. Any firm carries the feared risk of a total loss of invested capital, as well as additional pressure on your resources as a result of legal actions.
Shariah compliance: Muslims must ensure that their business operations do not fall under the list of prohibited business activities.
While real estate investing is one of the most sought financial options for Muslims, many struggle to take a position due to a lack of data or resources, making it an option that few are willing to explore on their own.
Pros: Land is a physical asset that may act as a hedge against inflation. It can generate reliable income at a greater rate than other investment types while also benefiting from long-term appreciation. Additionally, investing in real estate provides numerous tax benefits.
Cons: Requires a higher initial investment and limited liquidity. A thorough understanding of land and market trends is necessary. To look after tenants, consistent attention, maintenance, and administration are essential.
Shariah compliance: No interest-based mortgages are allowed. For commercial properties, investors must avoid leasing to tenants who engage in any type of non-Shariah-compliant business activity.
Cash is not an investment – but many Muslims keep it because they lack the information necessary to invest in stocks, enterprises, or real estate. As a result, they not only miss out on long-term growth but also suffer an annual loss of savings due to inflation.
Pros: Availability and liquidity.
Cons: Effectively generates a negative annual rate of return after inflation. What exactly does this imply?
Take the following two circumstances into consideration:
Muhammed sets aside $1,000 every month for five years. However, with inflation, his $60,000 funds are worth only $55,600.
Ayesha invests $1,000 each month for five years and achieves a 6% yearly yield. Even after inflation, her savings will equal $66,600.
Shariah compliance: Cash must be kept in a non-interest bearing account, such as a checking account. Cash stored in savings accounts and stock trading accounts typically earns interest and so does not fall under the Shariah/Halal category.
How do you deal with the portfolio diversification problems inherent in Shariah-compliant/Halal investing?
Portfolio diversification is sometimes a difficult endeavor, even for diligent Shariah-compliant investors. In the majority of shariah-compliant/halal investment cases, portfolios begin with an abnormally high balance of cash and equities.
According to the majority of financial consultants, investors should aim to have between 25% and 75% of their investment portfolio in bonds, as bonds provide a reliable source of income. There is, however, a caveat to this scenario for investors seeking Shariah-compliant/halal investment options.
Bonds, as is often known, create interest for the investor. If you want at least 75% of your investment to generate income, the absence of bonds complicates matters.
Sukuk is an Islamic financial instrument that is comparable to a bond in conventional finance. Due to the fact that interest collection is deemed ‘haram’ in Islamic culture, the majority of bonds are exchanged as Sukuks. Sukuk is a term that refers to a fixed-income instrument that is Shariah-compliant and offers consistent returns rather than explosive growth.
Sukuk addresses a significant worry for investors by making diverse sources of income available through a variety of investment venues. As a result, it creates opportunities in the secondary market for sukuk trading, where investors may sell their existing holdings in whole or in part for cash, including earnings when the transaction is profitable.
It is vital for Muslim investors to confirm that the incomes they receive are halal. Salaries and company revenue are included in earnings, as is income from halal investments.
In order to be a successful shariah-compliant/halal investor, you must first define your investment objectives, risk tolerance, and time horizon for your investment, as well as commit to learning everything you can about shariah-compliant/halal investing.