As a Muslim getting into halal investing, you’re probably trying to be cautious of what’s halal and haram.
This can get slightly complicated especially if you’re looking for dividends or passive retirement income.
If you’re considering getting a bond for this purpose, you probably clicked here wondering, “are bonds halal?”
Bonds are indeed haram.
In this article, we will discuss the factors that contribute to bonds being haram so that you may never get caught in the ways of haram income.
With the growing population of Muslims, big companies and banks are coming up with halal investment options.
For Muslims, before trading, investing, or banking, it is essential to check whether all regulations are according to the Shariah Law.
This article will also discuss other halal alternatives for bonds.
Why are Bonds Haram?
Bonds are certificates of loan issued by the government, private companies, or banks. People buying a bond are certain to receive their capital amount back.
In addition to that, the bond issuer will also give additional money accumulated over that time based on the interest rate.
Since the additional money is entirely based on interest, bonds fall under the haram category.
The concept of bonds as a whole is haram due to the involvement of riba.
However, over the years, many people try to give them different names and change certain aspects of bonds, such as saving certificates, or prize bonds.
This does not make it halal in any way.
Prize bonds, which are pretty commonly bought, are also not in accordance with Islamic finance.
The reason is that these bonds are based on the idea of gambling. Several people buy the bond, and one of them can win the total interest accumulated through a draw.
Hence, only one person gets all the money. Since the other people do not know whether they will win more money than invested, this becomes gambling. Hence, it is ultimately haram.
Moreover, the ones who do not win, but intend to, are engaging in chancing, which is yet another unlawful practice, according to the Shariah.
Even the acts of purchasing, selling, or dealing in the business of prize bonds are deemed haram by Islamic scholars.
This is because these acts are based on haram practices. They also encourage others to engage in haram methods of earning income.
Alternatives for Bonds in Islam
If you’re wondering how to receive dividends or passive income from your investments the right way, we’ve got all the information that you need.
There are several options available when it comes to halal fixed-income options. Below are some alternatives that are interest-free and compliant with Islamic religious values.
Sukuks are a form of bonds that are considered halal.
They are commonly referred to as Islamic bonds. However, they differ slightly from traditional bonds to comply with Sharia laws and Islamic principles.
Unlike conventional bonds, Sukuks are not paid as debt. Instead, each bond owner gets an asset, and the revenues generated by those assets are returned to the person.
These profits are due to Sukuks smoothing out the current irregular revenues generated by that property. This revenue is provided as an asset to the bond owners and turns them into regular returns.
If there are no revenues, there will be no returns. Hence, Sukuk does not work on interest. Instead, it is based on the concept of ownership, profits, and revenues, which are entirely halal.
It’s similar to purchasing stocks, but instead of owning a share of the company, you own a share in the assets of a company such as equipment, which is then used to generate profits.
These profits are then paid out to you as dividends you could use as passive income.
REITs or Real Estate Investment Trusts is another halal alternative to bonds. REITs allow you to buy a share in different properties and receive the profits in return.
These properties can be anything from residential, commercial, office, and industrial buildings obtained through halal means.
Like how you can buy stocks and invest in companies, REITs allow them to invest and help finance different real estate properties.
Luckily, the concept of REITs is completely halal as they generate profits through their operations. These property owners collect rent, generate profits, and trade different properties through halal means.
However, if the REITs are financed via debt and interest, they would be considered haram.
Therefore, it’s important to do your research on whether the REITs you’re looking at abides by Islamic principles.
The popularity of REITs come from their ability to pay high dividends to investors.
So if dividends are what you’re looking for, consider looking for REITs as an alternative to bonds.
Halal Dividend ETFs
Exchange-Traded Funds or ETFs are considered one of the best options for halal investments. They are funds traded on the stock exchange. These funds come from investments by different people.
The purpose of the funds can be anything. These include trading gold, oil, different technologies, or real estate.
However, it is essential to verify that the purpose of the fund is halal. The income and practices of all the companies related to the ETF should be halal too. Otherwise, it is not permissible to invest in that particular ETF.
We understand that it is a pretty challenging task to check whether an ETF is halal or not, as the number of investments involved can be numerous.
Hence, to avoid engaging in any haram ETF, we suggest going with halal-certified ETFs only. These ETFs are thoroughly verified by Islamic scholars and experts in the field.
This way, you can confidently invest in an ETF with no worries of your money funding haram practices.
You can look at the dividend yields from these ETFs to determine whether it’s a good investment for you or not.
Halal Dividend Stocks
Halal dividend stocks are shares of companies whose earnings are halal.
This means that they do not involve interest payments, have no haram activities like gambling, alcohol, tobacco, etc.
When you buy halal stocks, you have ownership of these companies.
In turn, when dividends are declared, you’ll receive a dividend income from your investments.
To find these stocks, you’ll need to look at the dividend yields and payout ratios from halal stocks, and determine if it’s a good investment for you.
Do note that halal dividend stocks are not an exact alternative for bonds as stocks carry way more risks. You’re better off selecting the first 3 as an alternative, although the risks involved are not entirely the same either.
Are bonds halal?
No, they are not, but there are other halal alternatives available.
However, finding halal ways to invest can be difficult at times. But if given the right amount of research, you can find the right investment option for you.
There are many things that Muslim investors have to verify with the Islamic laws before finally investing their money.
We recommend consulting a reliable financial advisor to invest your money the halal way.
Frequently Asked Questions
Are government bonds halal?
Government bonds are not halal. These bonds are based on debt and interest as they are indirectly given as a loan to the country’s treasury. The intention is to receive more money and profits through the total accumulated debt increments of all the bond owners. Hence, this practice falls under interest, gambling, and chancing, all of which are haram.