The realm of investment is extensive, encompassing various assets, strategies, and approaches. Yet, for the followers of Islam, it takes on a distinctive character, as each investment needs to conform to the principles of Islamic law or Sharia.
As a Muslim, it’s important to align your investments with your religious beliefs. Islamic investments, otherwise known as halal investments, are those that comply with Islamic principles and are free from any haram (forbidden) elements, such as interest, alcohol, or gambling.
With the increasing demand for halal investment options, there are now various choices available to cater to the needs of Muslim expats.
From Islamic mutual funds and sukuk (Islamic bonds) to real estate and even halal stocks, the options are diverse and enable you to grow your wealth while adhering to your faith.
It is this unique form of investing that this article aims to explore, providing insights into the principles, strategies, and opportunities that it presents for Muslims and non-Muslims alike.
This post is not intended to serve as investment advice or a professional recommendation. If you want more detailed advice, we suggest that you get the help of a financial counselor who is familiar with your goals.
If you want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.
What is Islamic Investing?
At its core, Islamic or Halal investing is a form of socially responsible investment method that falls in compliance with the Islamic law, or Sharia. While it shares several elements with ethical or socially responsible investing, it further incorporates Islamic finance principles, making it a specialized field.
Islamic finance is based on the teachings of Islam as they apply to financial dealings. The Quran, Islam’s holy book, serves as the inspiration for Islamic banking’s guiding principles.
Transactions in Islamic banking must adhere to Shariah, Islam’s legal code based on the Quran. Islamic banking is governed by a set of regulations known as fiqh al-muamalat that apply to financial transactions.
As per the Sharia law, certain types of businesses and transactions are rendered haram or prohibited, including those associated with alcohol, gambling, tobacco, pork, and conventional financial services that involve interest (riba).
Hence, these are universally ruled out as investment opportunities. Simultaneously, the law also discourages taking on excessive risk or speculation (gharar), thereby promoting financial stability and economic justice.
A crucial element of Islamic finance principles is the prohibition of riba, which refers to interest or unjust gains made during investment or trade.
In essence, riba is seen as a practice that leads to wealth distortion, enabling the moneylender to exploit others and increase their wealth without any substantial contribution to society.
This prohibition of riba presents a defining difference between traditional and Islamic investment.
For instance, while bonds, which fall under the category of riba al-nasee’ah due to their association with the increase in wealth over time, are popular in mainstream investing, they are considered impermissible for Muslim investors.
Consequently, Muslim investors often prefer stock investments, which are more in line with the Sharia principles.
Investing methods must take into account the many tenets of Sharia law. Because of this, adherents of Sharia law may be excluded from participating in significant economic sectors. Investing that complies with Sharia law is analogous to SRIs in the West.
Modern finance includes and will continue to include a growing subfield known variously as Sharia-compliant finance, Islamic banking, or Islamic finance.
There are already at least four Western financial services providers offering investment vehicles that are compliant with Sharia law but do not pay interest to investors or profit from gambling.
This is because Islamic countries in the Middle East have some of the fastest-growing oil economies in the world, and investors are keen to become involved.
There are religiously observant investment vehicles, known as Sharia-compliant funds. Islamic experts should form a Sharia board to ensure Sharia rules are followed. Members of the board must analyze the companies in which the fund invests in order to make sound investment decisions.
Equity participation systems, which are similar to profit sharing, are used by Islamic banks to generate revenue in place of the interest that would otherwise be charged.
When a bank lends money to a company with the promise of equity participation, the company agrees to repay the loan without interest in exchange for a percentage of the company’s future revenues. The bank will not be repaid if the company goes into default or loses money.
What are the key Islamic finance terms you should remember?
Islamic finance principles provide a comprehensive framework for Muslims to ensure their investment activities are in accordance with Sharia law. Although the principles have been in existence for centuries, their formal application in banking and finance was established only in the 20th Century.
It should be pointed out that while stocks are allowed in Islamic investing, investments in businesses associated with prohibited activities such as gambling, alcohol, and other such sectors are considered haram or forbidden as per Islamic finance principles.
Riba
The word “riba,” from the Arabic meaning “to increase” or “to exceed,” is frequently used to describe interest rates, fees, and other forms of unequal trade in the context of borrowing. Interest is forbidden in Islam because it is considered an unjust and exploitative gain.
The interest rate is known as “riba” in Islamic finance. Usury, the practice of charging exorbitant interest rates, is another name for it.
For the vast majority of Islamic legal scholars, the simultaneous exchange of items of uneven quantities or qualities is likewise a kind of riba. However, interest accrual is the topic at hand here.
Sharia law forbids riba for several reasons. Its purpose is to guarantee a fair trade. Its goal is to make unfair and unequal trades unlawful so that people can safeguard their riches.
Islam’s ultimate goal is to spread goodwill and generosity among its followers. Avoid developing feelings of selfishness and self-centeredness, which can lead to negative interactions with others.
By prohibiting interest-bearing loans, Sharia law provides individuals and communities with incentives to provide money to those in need.
While there is consensus among Muslims that riba is forbidden, there is significant disagreement about what defines riba, whether it is forbidden under Sharia law or merely discouraged, and if humans or Allah should punish those who engage in it.
While some may consider all interest to be riba and so illegal, others may only consider it forbidden if it is extreme.
For instance, even though there is a range of opinion concerning when interest becomes exploitative, some contemporary scholars hold that it should be permitted up to the value of inflation in order to compensate lenders for the time value of their money without creating excessive profit.
Nonetheless, riba is widely accepted as law and served as the foundation for the Islamic financial sector. For centuries, Muslims have debated the morality and legality of riba. However, as economic conditions grew more precarious, religious and legal restrictions on riba were relaxed.
Gharar
The Sharia rules prohibit participation in contracts with an excessive level of uncertainty or risks. Consequently, investments in short-selling or uncertain contracts are deemed forbidden.
The Arabic term gharar means “risk,” “uncertainty,” or “deception.” Some have referred to it as “the sale of what is not yet present,” such as the sale of unharvested crops or uncaught fish.
Important in Islamic finance, the notion of gharar evaluates the permissibility of high-risk investments including short selling, gambling, selling products or assets of dubious quality, or entering into a contract with unclear conditions.
The word gharar has entered the common vocabulary and come to mean many different things. When determining whether a sale or financial transaction is gharar, the degree of misunderstanding between the parties and the degree of doubt over the delivery of the products or payment are taken into account.
Transactions that are exceedingly ambiguous or that may create any injustice or dishonesty against any of the parties are generally forbidden under Islamic law, making gharar illegal under Islam.
The hadith, a sacred text in Islam, provides the rationale and direction for prohibiting contracts or transactions that are deemed gharar.
In it, the Prophet Muhammad is quoted in it as stating, “Sell not what is not with you,” which refers to things like birds in the sky, fish in the sea, and a fetus in its mother’s womb.
Therefore, when a claim of ownership is ambiguous or questionable, concerns of gharar arise.
The Quran also provides insight into the intended meaning of gharar by saying, “And do not eat up your property among yourselves for vanities,” which is commonly interpreted to suggest that predatory business methods are forbidden since they do not serve society as a whole.
In the world of finance, gharar is most commonly seen in the context of short selling, futures and options trading, and other forms of speculation. Due to the inherent risk associated with the future delivery of the underlying asset, most derivative contracts are prohibited and deemed illegitimate in Islamic banking.
The majority of derivative products are forbidden due to excessive uncertainty, however other practices considered gharar, such as commercial insurance, are essential aspects of economic life. Fungible things, such as wheat and other commodities, can also be sold short and delivered at a later date.
However, if neither party can be trusted to follow through on their promise of delivery, the deal should be considered void. A deal or contract is also deemed gharar if it involves undue risk or uncertainty, one party taking advantage of the other’s property, or one party gaining all the benefits while the other suffers losses.
Therefore, Islamic finance also forbids the practice of charging interest on loans, which is known as usury in the religion.
Murabaha
In the Islamic financing structure known as murabaha, also known as cost-plus financing, the seller and buyer mutually agree on the asset’s acquisition price and profit margin.
Interest, which is used to create the markup, is forbidden by Islamic law. Credit sales based on the murabaha model are permitted by Islamic law because they do not constitute interest-bearing loans (qardh ribawi).
Similar to a rent-to-own agreement, the buyer does not legally own the property until all loan payments have been made in full.
A customer requests that the bank buy an item on their behalf under a murabaha contract of sale. In response to the request, the bank draws up a contract outlining the terms of repayment, which are often spread out across multiple payments.
Unlike riba, the fixed fee charged for this loan makes it permissible for use in Islamic countries. To cover their costs, Islamic banks must charge a flat fee rather than interest on loans in accordance with the religion’s teaching that money is merely a medium of exchange without any intrinsic value.
Many people think this is just a different way to charge interest. However, the contract itself makes all the difference.
A murabaha contract is a sales agreement in which a bank agrees to purchase an asset on behalf of a client and resell it to the client at a profit. According to Islamic law, such a deal is permissible (halal).
Defaulting on murabaha contracts is becoming more of a worry for Islamic banks because of the prohibition on late fees. As a means of lowering murabaha default, many banks believe defaulters should be blacklisted and denied access to future loans from any Islamic bank.
Sharia law permits this arrangement even if it is not specified in the loan agreement. According to the Quran, a debtor may be granted forgiveness if they are experiencing true hardship and are unable to repay their loan on time.
Willful default, however, may result in government action. There is no universal agreement on how to handle defaults under murabaha contracts, which has created an issue for Islamic law-compliant businesses.
Murabaha financing is often used in place of loans in a variety of industries. You can use murabaha to buy everything from a refrigerator to a car to a house.
The finance is used to buy machinery, equipment, or raw materials for the company. Short-term transactions, such as the issuance of letters of credit for importers, are also popular uses of murabaha.
The applicant (the importer) is the one who receives the murabaha letter of credit. The issuing bank guarantees payment of funds if certain conditions are met, as stated in the letter of credit.
The exporter (the beneficiary) is assured of payment because the bank’s creditworthiness stands in for that of the application. The exporter gains since the bank is taking on the risk of nonpayment.
Then, the importer must pay back the bank the initial purchase price plus a profit margin according to the terms of the murabaha contract.
Sukuk
Sukuk is an Islamic financial certificate that is compliant with Sharia law and is the equivalent of a bond in Western finance.
Since the issuer of a sukuk cannot employ the standard interest-paying bond structure common in the West, they instead sell a certificate to a group of investors and use the money to buy an asset in which the investors have a partial ownership stake.
The issuer must also agree to repurchase the bond at face value at a specified future date.
Sukuk were developed to facilitate the equitable distribution of the benefits accruing from a single asset purchase by linking the returns and cash flows of debt financing to that asset.
By doing so, they can avoid breaking Sharia law while yet enjoying the advantages of loan finance. However, sukuk are only able to be used to raise capital for movable goods.
Therefore, sukuk are a representation of the total, undivided interest in an asset that is directly related to a certain project or investment.
A sukuk investor does not own a financial obligation owing by the bond issuer but rather a stake in the underlying asset. Sukuk holders, in contrast to bond holders, are entitled to a share of the asset’s profits.
Maisir
Also known as maysir, speculative investments or those involving gambling are prohibited under Sharia law. Investments that include contracts with ownership reliant on uncertain future events are considered precarious and thus, impermissible.
Due to its reliance on chance rather than hard work to generate riches, Maisir is strictly forbidden in Islamic banking.
Since commercial risk-taking is fundamental to Islamic financial operations, Sharia does not forbid the regular commercial speculation involved in a corporate enterprise.
Options, futures, and other derivatives are not utilized in Islamic finance because they violate the ban on maisir.
What are the pros and cons of Islamic investing?
With the global Muslim population on a steady rise, the demand for Islamic finance products and banking is experiencing a similar growth trajectory.
Despite the economic slowdown, this 2023, S&P Global Ratings projects that the worldwide Islamic finance industry would increase by roughly 10% in 2023-2024.
This follows a similar expansion in 2022, which was driven mostly by the GCC countries.
According to a report published by S&P on Monday, the sector continued to grow in 2022, with assets increasing by 9.4% compared to 12.2% in 2021. This increase was driven by expansion in banking assets and the sukuk business.
Moody’s Investors Service predicted in a March report that after declining 10% in 2022 to $178 billion, global sukuk issuance will “level off” in the range of $170 billion to $175 billion in 2023.
According to that report, strong economic growth and development goals in key regions are expected to push demand for Sharia-compliant financing to outperform conventional lending in 2023.
The primary attraction of Islamic finance lies in its balanced approach to wealth creation. While it doesn’t prohibit making money, the law emphasizes ethics and justice, thereby ensuring a balance between religion, family, life, intellect, and property.
Moreover, investments within Sharia-compliant products can potentially reduce the investor’s risk, contributing to the stability of Islamic banks.
Like any investment strategy, Islamic investing comes with its share of benefits and risks.
Pros:
- Social Responsibility: Halal investments align with socially responsible approaches, leading to human rights protections, equitable distribution of wealth, and minimization of environmental degradation.
- Reduced Risk: The low debt requirements of Islamic finance principles reduce susceptibility to massive market changes and fluctuations, lowering overall exposure.
- Ethical Wealth Growth: Halal investments enable Muslims to grow their wealth ethically while engaging with global markets.
Cons:
- Limited Opportunities: Given their recent introduction to the finance niche, finding suitable Halal investment products can sometimes prove challenging.
- Extensive Due Diligence: Halal investments require thorough information gathering, which can be time-consuming and require meticulous attention to detail.
- Diversification Challenges: The time and consideration required for Halal investments often result in less diverse portfolios, which may grow slower than traditional investments.
Like any investment, halal investments come with their own set of risks and benefits. It’s important to understand these factors before making any investment decisions.
Some of the benefits of halal investments include the potential for long-term growth, diversification of investment portfolio, and the ability to invest in assets that align with your religious beliefs.
Halal investments also promote ethical conduct and social responsibility, which can be personally fulfilling for Muslim expats.
However, it’s important to note that halal investments are not immune to risks. The performance of halal investments can be influenced by market conditions, economic factors, and other external events.
Additionally, like any investment, there is always a risk of losing money, and it’s important to carefully consider your risk tolerance and investment goals before making any investment decisions.
How should you get started with Islamic investing?
Real estate
Real estate has always been a popular investment choice for many individuals, and Muslim expats are no exception. Investing in real estate provides a tangible asset that can appreciate in value over time and generate rental income.
In the context of halal investments, real estate can be a viable option as long as certain conditions are met.
For example, investing in residential properties for rental purposes is generally considered halal, as long as the rental income is derived from halal sources and the property itself does not involve any haram activities.
Another option for Muslim expats is to invest in Islamic real estate funds or REITs (Real Estate Investment Trusts). These funds pool money from multiple investors to invest in a diversified portfolio of halal real estate assets.
This allows Muslim expats to benefit from real estate investments without having to directly manage the properties themselves.
Stock market investments
Investing in the stock market can be a lucrative way to grow your wealth, and there are halal options available for Muslim expats as well.
Halal stocks are those that comply with Islamic principles, which means they are free from haram activities such as alcohol, gambling, and interest-based financial services.
To identify halal stocks, Muslim expats can refer to Shariah-compliant stock indices or consult with Islamic scholars who specialize in Islamic finance.
These scholars evaluate companies based on their business activities, financial ratios, and compliance with Islamic principles to determine their eligibility as halal investments.
Investing in halal stocks can provide Muslim expats with the opportunity to diversify their investment portfolio and potentially earn long-term returns.
However, it’s important to note that investing in individual stocks carries risks, and thorough research and analysis are necessary before making any investment decisions.
Halal investment funds and Islamic banking options
For Muslim expats who prefer a more hands-off approach to investing, halal investment funds and Islamic banking options can be attractive choices. Halal investment funds, also known as Islamic mutual funds, are investment vehicles that comply with Shariah principles.
These funds pool money from multiple investors and are managed by professional fund managers who invest in a diversified portfolio of halal assets.
Muslim expats can choose from various types of halal investment funds, such as equity funds, sukuk funds, and real estate funds, depending on their risk tolerance and investment goals.
Islamic banking, on the other hand, offers a range of financial products and services that comply with Shariah principles.
Muslim expats can open halal savings accounts, participate in Islamic financing for home purchases or business ventures, and access other banking services that are free from interest-based transactions.
Several other investment avenues conform to the principles of Halal investing, providing a range of options for Muslims and interested non-Muslims alike.
- Gold and Other Precious Metals: These assets are considered a safe and traditional means of investment that complies with Islamic finance laws.
- Sukuk: As an alternative to traditional bonds, Sukuks or Islamic bonds do not bear any interest and are generally asset-based. They present a conservative investment option within the ‘fixed income’ market.
- Halal Start-ups: With the global rise of start-ups, investing in Halal start-ups presents an emerging opportunity for Muslims.
Screening potential investments for their compliance with Islamic finance principles is a crucial part of Islamic investing. This includes evaluating the company’s business activities and financial statements to identify its primary revenue sources and understand how its balance sheet is managed.
For Muslim investors, companies with Halal practices are the best option as there is no overlap of Halal-Haram considerations. Companies with a mix of Halal and Haram practices should ideally be avoided.
What should you consider when making Islamic investments?
When selecting halal investments, there are several factors that Muslim expats should consider to ensure their investments align with their financial goals and religious beliefs.
Firstly, it’s important to assess the halal compliance of the investment. This involves evaluating the underlying business activities, financial structures, and compliance with Islamic principles.
Consulting with Islamic scholars or financial advisors who specialize in halal investments can provide valuable guidance in this process.
Secondly, consider the risk and return profile of the investment. Like any investment, halal investments carry risks, and it’s important to assess the potential returns and volatility associated with the investment.
Understanding your risk tolerance and investment horizon can help you make informed decisions.
Additionally, consider the liquidity and accessibility of the investment. Some halal investments may have restrictions on liquidity, meaning it may be difficult to convert them into cash quickly.
Understanding the terms and conditions of the investment and assessing your financial needs and goals can help you choose investments that align with your liquidity requirements.
Lastly, as with all investments, consider the fees and charges associated with the investment. Different investment options may come with different cost structures, including management fees, transaction fees, and other charges.
Understanding these fees can help you assess the overall cost of the investment and its impact on your returns.
Final thoughts
Halal investing presents an ethical and socially responsible approach to building wealth. It combines the principles of Islamic law with the dynamics of the financial markets to create a unique investment landscape.
This form of investing is accessible to all, irrespective of religious beliefs, and offers a range of investment opportunities.
While it may require some additional scrutiny and due diligence, Halal investing is not restrictive. Instead, it encourages Muslims to invest responsibly and ethically.
With the continual growth of the Muslim population worldwide and the expansion of many Muslim economies, it is likely that Halal investment products will become increasingly accessible in the coming years.
Despite its religious roots, Halal investing holds lessons for all investors, regardless of their faith. It underlines the importance of ethical investing, social justice, and balanced wealth creation.
As a Muslim expat, investing your money in a halal way is not just a matter of choice but also a religious obligation.
Islam encourages its followers to be wise stewards of their wealth and encourages them to seek halal sources of income. By investing in halal assets, you are not only fulfilling your financial goals but also fulfilling your religious duties.
Halal investments provide Muslim expats with the opportunity to grow their wealth while staying true to their faith. By choosing investments that are free from haram elements, you can have peace of mind knowing that your money is being invested ethically and in line with Islamic principles.
Moreover, halal investments also promote social and economic development. By investing in businesses that are beneficial to society and avoiding industries that are harmful, you can contribute to the betterment of the community and help create a more just and equitable society.
From real estate and stocks to investment funds and Islamic banking options, there are various halal investment opportunities available.
When choosing halal investments, it’s important to understand the concept of halal investments, the importance of aligning your investments with your religious beliefs, and the types of halal investment options available.
Factors such as halal compliance, risk and return profile, liquidity, and fees should be carefully considered to make informed investment decisions.
By investing in halal assets, Muslim expats can not only achieve their financial goals but also contribute to the betterment of society and fulfill their religious obligations.
With careful research, consultation with experts, and a clear understanding of your financial needs and goals, you can navigate the world of halal investments and make choices that align with your faith.
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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
