We offer Halal Investment Options...
What are Halal Investments?
Halal investing is also known as Shariah-compliant investing. The objective of the Shariah is to protect five areas: religion, life, intellect, family, and property. In this way, the Shariah creates a balanced ecosystem of social responsibility between the individual and society. Individuals may pursue self-interest, but must also be conscious of the interests of others. The Shariah is designed with an encompassing view of society that governs a balanced relationship between the two.
The following are the six foundations of Shariah-compliant investing:
- Profit sharing
- Prohibition of riba (unjust, exploitative gains)
- Prohibition of gambling
- Lawful activities
- Ethical and moral values
- Linkage with the real economy
Halal Investment Options
There are four common Halal investment options: Stocks, Businesses, Real Estate, and Cash.
Stocks – publicly traded shares of companies – are the most common investment type Muslims use.
Pros: Stocks provide investors access to a wide array of company sizes and types. They are liquid, allowing investors to contribute and withdraw money in short time periods.
Cons: Stocks are considered a higher risk investment because prices can fluctuate significantly – such as when the NASDAQ fell 78% in 2000-02 and the DJIA fell 50% in 2007-09. Few stocks pay dividends, and the ones that do generally do so at below the rate of inflation.
Shariah-compliance: Many Muslims buy stocks without knowledge that the shares they are buying may not be Shariah-compliant. Significant time must be invested into screening each company’s stock for Shariah compliance and continually monitoring to ensure that the company remains compliant. To illustrate, the Shariah board of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has identified three areas required to ensure compliance of stocks:
Type of Share
Only common stock is Shariah-compliant. Preferred shares, which are a combination of debt and stock, are non-compliant.
Non-compliant activities must be <5% of total income. These include: Alcohol, gambling, tobacco, adult entertainment, pork products, defense, interest income, conventional insurance, conventional financial services
Restrictions on levels of company debt, cash, and receivables.
Direct business ownership is a less common investment option for Muslims. An individual either runs the entire business themselves, or partners with a group to run the business.
Pros: Direct control over the business and high potential returns.
Cons: Requires significant investment of time and knowledge to be competitive in the market. Business ownership is the riskiest investment type, with the potential to lose all invested capital and possibly more given exposure to lawsuits.
Shariah-compliance: Muslims must ensure that their business activities do not fall into the non-compliant business activities list as shown above.
Cash is not an investment – but many Muslims hold cash because they are unsure how to invest in stocks, businesses, or real estate. As a result, not only are they missing out on growing their money for the future, but each year their savings are reduced by approximately 2.5% due to inflation.
Pros: Liquid, available immediately.
Cons: Effectively produces a negative return of -2.5% per year after inflation. What does this mean? Consider the following two scenarios:
Ahmed saves $1,000/month for 5 years. But, after adjusting his $60,000 savings for inflation, his money is only worth $55,600.
Fatima invests $1,000/month for 5 years and earns a 6% annual return. Her savings will total $66,600 – even after inflation.
Shariah-compliance: Cash must be held in an account that does not pay interest, such as a checking account. Cash held in savings accounts, stock trading accounts, and 401(k)s is usually paid interest and therefore, not Shariah-compliant
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