What makes an investment Halal-friendly? A look into identifying the different types of Shariah-compliant options.

Halal investing is a concept that refers to Shariah-compliant investments. Halal investing can also be thought of as a form of socially responsible investing in today’s terms.

The Shariah’s aim, according to Islam’s religious tenets, is to protect and maintain five areas: faith, life, intellect, family, and property. Shariah doctrines and guidelines help to establish a balanced ecosystem of social responsibility between society and individuals. While it is not forbidden to follow one’s interests, it is expected that they do so without disregarding the interests of others – and this includes aspects like investing and personal money management.

There are plenty of Shariah-compliant investments in this country that were created to govern a harmonious relationship between individuals looking to be socially responsible with their personal finance in Malaysia and also be beneficial to Malaysian society as a whole.

Halal investing applies to investments made per Shariah Law (or Islamic law). Shariah is an Islamic law that is based on Islamic practices and customs. Earning interest is prohibited in Islam – and this is a defining tenet of investing. When investing following Shariah law practices, you are expected to do so in a socially responsible manner. For example, investors are recommended not to invest or engage their funds in industries that are closely connected or associated with items like smoking, alcohol, or pornography.

#1. Islamic Unit Trust, Mutual funds, and ETFs

Mutual funds in ASNB (Amanah Saham Nasional Berhad) do not necessarily fall under the Shariah-compliant status, but there is a fatwa of ‘harus’ as an exception, meaning that ASNB is still usable by Muslims. Tabung Haji is, of course, a Shariah-compliant investment. Tabung Haji is also a major institution that can handle zakat contributions from your investment gains on your behalf.

When it comes to other mutual funds and unit trusts, you can usually (but not always) tell whether they are Shariah-compliant by looking at their name. It’s an Islamic investment if the words “Shariah”, “Islamic”, and/or “Sukuk” (an Islamic variant of bonds) appear in the name.

When it comes to ETFs, it’s worth noting that not all of them are Shariah-compliant. In essence, ETFs (exchange-traded funds) are traded on an exchange much like stocks and are similar in a lot of ways to mutual funds. The key difference being that ETFs are purchased and sold throughout the day on stock exchanges while mutual funds are bought and sold according to their price at the day’s end.

Shariah-compliant ETFs are different from conventional ETFs in a few ways. For one, they are based on an Islamic benchmark index where index constituents include organizations that are strictly Shariah-compliant. Additionally, Islamic ETFs must follow the Shariah principles and guidelines, which are monitored by an appointed committee.

There are a handful of Shariah-compliant ETF options available in Malaysia, and most of them can be identified as Shariah-compliant by their names (usually including the word Islamic).

#2. Halal Stocks

Halal stock investing is all about making decisions based on Islamic values. Investments are screened by an independent committee of Islamic scholars to ensure that investors do not benefit from gambling, weapons, etc., and that they do not earn money from interest or loans.

Investment in some sectors and businesses that fall outside the ethical realm is prohibited under Shariah law. Halal investors must determine whether their halal stock investment falls within the category of socially-responsible or ethical investment. According to Islamic values, investors share gains and losses, do not collect interest (riba), and do not invest in prohibited companies.

Many Muslims purchase stock without realizing that the stock they are purchasing might not be Shariah-compliant. Each company’s stock must be thoroughly screened for Shariah compliance, and the company and its operations must be continually monitored to ensure that they remain Shariah-compliant.

To highlight this point, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI Sharia)’s board has defined three key areas where stock enforcement must be ensured in order to identify if it is halal or not:

  • The interest-bearing debt of the corporation should not exceed 30% of its market cap.
  • The current interest-earning assets should not exceed 30% of its market cap.
  • The income produced from Islamically prohibited activities should not exceed 5%.

For the most part, acquiring shares of corporations that may undertake transactions in riba (interest) and other Islamic-prohibited concepts is generally prohibited, even if the corporation’s primary activity is permissible. However, there are some exceptions to the rule, and the key points mentioned above are guidelines from the board to identify permissible stock options.

#3. Business Activities

The halal industry is a colossal one, with countless business opportunities propping up every year comprising products, services and platforms that are aimed at a growing Muslim market and its many developing sectors.

From an investment perspective, delving into a promising business venture – or directly investing in one – can be the perfect financial move. Investing based on religious values might be a small trend in the grand scheme, but it’s gaining momentum and popularity steadily. What’s more, many of the guidelines that revolve around halal business align with socially responsible investing (a trend that’s growing fast around the world).

The concept is simple; invest in existing businesses or business ideas that do not encourage harm or vice in society. Instead, these companies must be beneficial for society, and be in accordance to the rules of business as stated in Islamic teachings. To be more specific, non-compliant activities must account for less than 5% of overall revenue. Alcohol, gambling, cigarettes, adult entertainment, pork products, protection, interest income, traditional insurance, and traditional financial services are examples of these.

Apart from that, Muslims can’t make a profit from lending money, so earning interest is out of the question. Finding Islamic-compliant business investments can be tricky since most of the developed world relies on an interest-based economy, but fortunately countries like Malaysia make it slightly easier to seek out Halal-friendly ventures. Some Muslim-friendly sectors that are growing include Muslimah fashion, halal food ventures and even halal cosmetics or health and beauty products.

#4. Gold

Gold is commonly regarded as a rather halal investment. Indeed, you might claim that Islam adores gold. So much so that the state of Kelantan is attempting to become more Islamized by encouraging the use of gold dinars and dirhams as legal tender.

From an investor’s standpoint, gold has long been a steady commodity that traders constantly run back to when market volatility rises. This is due to gold not being as unstable as other forms of traded currency. It’s a strong anchor in the trading world, and there’s good reason to consider gold now since its value has significantly increased over the past 5 years and outperformed the market during times of recent volatility.

You can buy gold the old-fashioned way (by holding physical chunks of gold) or purchase percentage shares in gold bullion or coins online. With the rise of Fintech, things get a little more convenient (albeit complicated). There are all sorts of e-gold, digital gold, or gold investment accounts. Some platforms allow you to trade gold with other sellers online and cut middleman fees, while other innovative platforms allow you to set a direct debit on gold and save over time. The limits are seemingly endless.

Just be cautious when buying gold. Many Ponzi schemes and scams connected to gold have been exposed, so do your due diligence.

When you buy gold online, it’s also important that you buy an actual physical asset with clarity over ownership and records to prove it (this is a key point for halal validity). You can also invest in ETFs that hold physical gold, but ETFs that hold gold futures and options are considered haram. Futures and options are generally seen as non-permissible in Islam.

#5. Real Estate

Real estate is a timeless option for many investors, being a popular, relatively stable and fairly uncomplicated concept to grasp. It comes with its own set of challenges, but earnings can be phenomenal, and volatility is considerably lower than other investment options. It’s also a common choice among Muslims.

However, there are things to watch out for as a Muslim real estate investor. For one, property acquisition is very closely connected to the conventional financing process offered by most banks. This means riba (interest) is involved when you apply for a loan to buy a house. Fortunately, Malaysia’s Islamic Finance sector has developed considerably in the past few years, and there is an array of Islamic-friendly lending alternatives to choose from. Many of the major banks have Islamic banking options now.

On another note, investors of commercial properties have to be careful not to lease their assets to any tenants who are engaging in commercial operations that are not Shariah-compliant (opening a bar or a gambling establishment, for instance).

Conclusion

Whether you are a Muslim or non-Muslim investor, it is interesting to learn about these 5 types of halal-friendly, socially-responsible investment options. With this knowledge, you can be sure your investment choices align with Shariah law.

 

Would knowing that an investment is halal-friendly interest you more as an investor?

 

You May Also Like