Halal investing, also known as Sharia-compliant investing, refers to investments made in accordance with Islamic principles or Sharia law. Halal is an Arabic term meaning “lawful or permitted” that describes what is permissible under Islamic law. In Islam, it stands in contrast with the word haram (which means “unlawful or not allowed”). Halal investing, as the name implies, dictates the boundaries of permissible investments and ensures your financial activities align with the ethical guidelines and prohibitions outlined in Sharia law.
For Muslim investors, investing is more than just about financial growth. It is also about fulfilling their religious obligations and avoiding investments that may be haram or prohibited by Islamic law. So, for them, aligning financial goals with ethical values is not just a choice but a commitment to their religion. Beyond the religious aspect, halal investing has gained significant traction among a wider audience in recent years as it promotes a broader sense of ethical investing, encouraging practices that benefit society and avoid harm.
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This guide is your gateway to a clear understanding of what halal investing is, its core principles, and how to balance financial growth with ethical considerations. We will also explore the investment vehicles in halal investing, risk management, screening criteria for halal investments, and the key differences between socially responsible investing and halal investing. Furthermore, this blog will provide you with insight into the growth prospects for the halal investing industry and the emerging trends in Sharia-compliant finance. Let’s learn how halal investing can help you grow your wealth ethically and financially.
Halal investing adheres to principles derived from Islamic law (Sharia) to ensure transactions are ethical, socially responsible, and in accordance with religious values. Let’s take a look at what the core principles of halal investing are.
By understanding these four key principles of halal investing, following its rules and restrictions, and choosing Sharia-compliant products and services, you can ensure your investments are both financially and ethically sound.
Striking the perfect balance between financial growth and ethical considerations is the cornerstone of halal investing. There is more to halal investing than selecting Sharia-compliant financial products. Keeping your wealth free of haram elements is a commitment to uphold the integrity of your Rizq (sustenance).
Understanding the concept of Rizq sheds light on the importance of ethical values in Islamic finance. In the Quran, the concept of Rizq underscores the belief that all forms of sustenance, including health, knowledge, time, and wealth, are divinely provided and should be obtained and utilised ethically. So, we should seek our sustenance lawfully. That’s why halal investing embodies this concept and promotes ethical wealth accumulation, ensuring that investments are made in ethical and socially responsible industries. By adhering to the core principles of Sharia law, halal investing steers clear of interest, invests in sustainable industries, promotes charitable giving, and refrains from unnecessary risk-taking and speculation.
Identifying investment vehicles that are in line with the laws and rules of Islamic finance can be a daunting task. Investment vehicles often have complex structures that make it difficult to determine whether they are compliant. Also, the strict criteria and Sharia principles rule out a lot of potential investment opportunities, which may, in turn, result in lower returns and limited portfolio growth. Despite the challenges and limited investment choices, we can still find a lot of viable halal investing options with thorough research and careful screening.
Here are some of the widely accepted halal investment options:
Halal stocks, or Sharia-compliant stocks, are one of the most popular investment vehicles for halal investing. They are the ownership shares of companies that operate in permissible industries, complying with Islamic principles. You should be aware of the modus operandi of the company you are investing in, ensuring they are not partaking in any prohibited activity for generating income. Also, avoid stocks from companies that are considered excessively risky.
Exchange-traded funds, or ETFs, and mutual funds have long been hailed as some of the most accessible investment options that offer diversification. Islamic mutual funds are funds that abide by the rules of Sharia law, generating returns through permissible means by avoiding prohibited activities and interest-based transactions. While investing in ETFs, make sure they hold actual underlying assets rather than using derivative instruments to replicate the performance of a benchmark. Also, examine carefully the companies or assets in a fund for compliance with Sharia principles.
Sukuk, which is often referred to as Islamic bonds, is another popular halal investment vehicle. Unlike the interest-paying bond structure of traditional debt-based bonds, Sukuk is backed by tangible assets. It is structured by following Islamic investing principles, and the investors receive a share of the profits generated by the underlying asset instead of interests.
Like any other form of investment, real estate investments, including Real Estate Investment Trusts (REITs), can be halal investments by ensuring their adherence to Islamic financial guidelines. When investing in properties, ensure that the mortgages obtained are considered halal mortgages, free of riba. A Sharia-compliant REIT, also known as an I-REIT, is an investment vehicle that provides investors with the opportunity to invest in income-generating real estate properties while conforming to Islamic law.
As in any financial system, an efficient risk management strategy that identifies, measures, monitors, and limits risks is necessary in Islamic finance as well. Risk management in Islamic financial transactions aligns with the Sharia aim of wealth protection, promoting transparency, human well-being, and prosperity, and prohibiting excessive risk-taking activities.
Since it is crucial to ensure all financial transactions in halal investing adhere to Islamic principles, ethical considerations are at the heart of its risk assessment and mitigation. By prioritising transparency in business dealings, avoiding prohibited and excessive risk-taking activities, and utilising Sharia-compliant structures, investors can manage risk while staying true to their ethical values.
For sustainable growth and long-term financial security, employ risk management strategies like diversification, comprehensive research, due diligence, continuous monitoring and compliance, ethical screening, and risk-sharing.
The key to successful halal investing lies in thorough ethical screening and due diligence. Ethical screening in halal investment implies the process of analysing investments to ensure that the businesses in which you invest are ethical and Sharia-compliant. The screening criteria for halal investments include the following:
Always perform due diligence by evaluating financial statements, business practices, and legal frameworks to ensure the investment meets the ethical and financial guidelines set forth by Islamic law.
Socially Responsible Investing (SRI) is an investing strategy that focuses not only on the financial returns but also on the environmental, social, and governance (ESG) factors of the investment. Even though SRI and halal investing are rooted in ethical considerations, there are conceptual differences in their underlying principles and screening criteria. Halal investing is very specific about investing in companies that abide by Islamic principles, while SRI emphasises more on investments in companies with strong sustainability practices and social impact, irrespective of religious guidelines. Also, the investment portfolio is more limited to halal investing than SRI due to the strict Islamic finance principles.
Despite the differences, both SRI and halal investment share a commitment to ethical values, including transparency, fair treatment, corporate governance, and social responsibility. As they both focus on ethical investments, their collaboration can unlock significant growth and attract new investors by developing joint investment products like ethical and Sharia-compliant funds.
Halal investments appear to have a promising future as the global halal economy thrives and more investors seek to align their investments with their values. The State of the Global Islamic Economy Report (SGIE) 2023/24 estimates that Islamic finance assets will grow to US$5.96 trillion in 2026 from US$3.96 trillion in 2021. Moreover, emerging trends like digitalisation, asset securitisation, private equity, and integration with SRI open doors of tremendous opportunities for growth and innovation.
Indeed, innovation and technology have led to Islamic finance adopting robo-advisors and fintech to identify global investments with the highest growth potential among thousands of Sharia-compliant investments. A growing number of FinTech platforms are adding Sharia compliance to their core markets. Green Sukuk, hybrid financial products, Sharia-compliant venture capital, Islamic real estate investment trusts (REITs), etc., have become more popular in recent years. As Islamic finance opens up new markets and industries, it looks to have a bright future.
In sum, halal investment is a compelling option for investors seeking to balance financial growth with ethical values. By clearly understanding what halal investing is, the core principles of Sharia law, and the concept of Rizq, you can achieve that perfect balance. Adhere to the laws and rules of Islamic finance, avoid prohibited industries, and invest in permissible investment vehicles such as Sharia-compliant Stocks, Islamic Mutual Funds and Exchange-Traded Funds (ETFs), Sukuk, Real Estate Investment Trusts (REITs), and Property Investments.
Always ensure to do a background check on the business operations and financial information of the company you are investing in. Performing thorough research, ethical screening, due diligence, and proper risk management will help you navigate the complexities of halal investment. Get ready to grow your wealth ethically and responsibly through halal investments.