Defining a Halal Investment
Conditions that Muslims Observe when Investing in Financial Markets
Jan 23, 2008
A halal investment denotes investing in financial products that adhere to Shari'ah (Islamic law). There are two categories that an investment instrument has to fulfill in order to be deemed a permissible investment. In addition, Islamic law relays that everything is considered to be halal, unless expressly stated otherwise (forbidden, or in Arabic, haram) (Bukhari).
Muslim investors therefore study an investment based on two concerns. Firstly, it has to be free of interest and secondly, the business model of the stock must not be haram in nature.
Investments that Are Interest-free
Interest is explicitly haram in Islam. One must not earn income based on interest. The Qur'an strictly warns: O ye who believe! Devour not interest, doubled and multiplied; but fear Allah; that ye may (really) prosper (Imraan; 130).
In contemporary finance and investments, instruments that earn interest income are ruled out - this would include loan stocks, bonds and other debt investments. Muslims, therefore, are allowed to invest in other investment instruments, such as shares, REITs (Real-Estate Invesment Trust), unit trusts and life insurance. Generally, these instruments provide income in the form of dividends. Dividends are also known as profit sharing, thus, the investor is actually sharing the returns of the company he or she has invested in. This way, income earned is not seen as passive income (interest). Income is based on the performance of the company.
Investments with a Halal Business Model
Since the general rule stipulates that besides activities that are expressly forbidden, Muslims are allowed to invest in shares, REITs, unit trusts and life insurance, as long as the income received from them is not tainted with haram business activities. To determine what will constitute a halal business model, one can easily eliminate businesses that engage in forbidden activities.
These would include: companies in the liquor industry, tobacco companies, pork-related products, the weaponary industry, corporations that engage in gambling activities, conventional banking facilities, the entertainment industry and the sex industry. Companies that do not engage in the above activities are deemed permissible investments. This condition is formulated to eradicate society's social ills that breed under the presence of these halal industries. Also, when Muslims support halal-only investments, this builds up a strong base to increase values for future generations. It also encourages economic expansion to be reliant on halal ventures and create amiable economic partnerships with other Islamic-based economies.
Muslims, therefore, must strictly adhere to these two principles when considering investment options. Finding Shari'ah compliant investment instruments is an obligation upon all Muslims in lieu of obeying God's commandments through the Qur'an and the Hadith.
