What is Halal investment? What are its benefits? How does it differ from other types of investments?
As Muslims around the globe continue to increase their spending power, the demand for halal products has grown significantly.
This has led to a surge in the number of halal companies operating in various sectors such as banking, insurance, retail, manufacturing, and logistics.
In this post, I’m going to talk about halal investing and how you can do so in Singapore.
The Basic Concept Of Halal And Haram
- Halal is an Arabic word used in the Quran and is defined as permitted, legal, or lawful in Islam.
- While haram, on the other hand, is also an Arabic term and is defined as the opposite of halal. It means impermissible, illegal, unlawful, or sinful in Islam.
Prophet Muhammad SAW stated:
“Halal is clear, and the haram (unlawful) is clear. Between the two, there are doubtful matters concerning which people do not know. One who avoids them in order to safeguard his deen (religion) and his honour is safe, while if someone indulges in it, he may be indulging in the unlawful.” (Bukhari)
The Quran and Sunnah have clarified in their teachings what is permissible (halal) and what is not allowed (haram) for Muslims.
One of the teachings of Islam is that all its followers (Muslims) should only take part in activities that are lawful (halal)rather than the haram ones to lead a peaceful life, strengthen Imaan, and increase their blessings for the day of judgment.
Linking Islam And Investments
Al-Istithmar is an Arabic word that is broadly defined as investments. This term refers to activities that help grow one’s revenue or wealth.
Islamic belief is based upon the fact that only Allah SWT has the power to provide and can take back things at any time.
Another belief in Islamic teaching is that all possessions and wealth one contains belongs to Allah SWT and has been bestowed upon us by him only.
This is why Allah SWT has instructed humans to manage their wealth in a lawful (halal) way with responsibility and utilise it for purposes that may help them and others.
In today’s world, investment is considered a crucial way of financial planning. The practice encourages you to make proper use of your savings to achieve specific goals in life, such as a transaction goal, speculative motive, or precautionary motive.
Islam also encourages Muslims to strive to seek income, spend it, and save beneficially to manage their wealth and utilise it for the welfare of people. This is evident by the statement in the Quran that says:
“And when the prayer has been concluded, disperse within the land and seek from the bounty of Allah, and remember Allah often that you may succeed.” (Al-Jum’ah: 10)
There are various kinds of investments available for acquiring financial stability. But among the varieties of investments offered, a Muslim must identify the ones that abide by the shariah.
Islam does allow Muslims to invest. However, being involved in such economic activities should neither be over-influenced by the glamorous profits one could gain nor cause us and our faith to deviate from Allah SWT.
This teaching ensures the safety of a Muslim from developing greed for worldly wealth, which might drive one to pursue unlawful means to multiply their profits.
Hence investments can be made by a Muslim in accordance to shariah to manage wealth systematically and wisely.
Allah SWT says in the Quran:
“You will surely be tested in your possessions and in yourselves. And you will surely hear from those who were given the Scripture before you and those who associated others with Allah much abuse. But if you are patient and fear Allah indeed that is for the matter (worthy) of determination.” (Al-Imran: 186)
What Classifies As Haram And Halal in Islamic Investments?
There are certain guidelines provided by religious scholars based on Islamic finance principles which label an investment either as halal or haram. In the current financial world, hundreds of thousands of investments are offered to the public.
Without proper research, selecting a legit halal investment from this wide variety can make you confused.
For this reason, a Muslim investor is instructed to learn how to differentiate between haram and halal stocks to manage wealth responsibly.
To help you classify whether the stocks you are offered are permissible for you or not, I have compiled a list of things you should look for before investing.
How to choose a halal investment?
Riba, also known as interest, is the critical feature of distinguishing between a permissible and non-permissible investment.
Investments that include an interest payment are strictly prohibited and condemned in Islam. The practice concept behind this is the exploitation of others to increase your wealth.
A lender usually gives money for a specific time period and takes profit over it, which is known as interest.
Stocks mainly do not consist of a riba. This is why Muslim investors prefer purchasing halal stocks.
But other investments like bonds containing paying or charging riba are prohibited for Muslims as the profits are received without contributing any effort and exploit the borrowers for personal gains.
Gharar or uncertainty is coined from an Arabic word that means ‘to deceive’. Investments or stocks that contain the element of gharar or uncertainty are prohibited for Muslims.
In simple words, gharar is the sale of products or assets that are not present.
The shariah finance principles do not allow you to partake or invest in stocks with gharar.
This is because there is a potential risk for loss, and it might turn out to be a deception to scam your wealth.
Maysir is also known as gambling or speculation. This type of investment depends on luck or chance to make a profit rather than working for it through a productive activity.
Therefore stocks or other forms of investments that include the element of maysir are labelled as forbidden for Muslims.
According to the Islamic finance principles based on creating a just and ethical society, investing in companies involved in producing and selling haram articles is not allowed for a Muslim.
To secure halal stocks or other investments, you need to refrain from investing in companies that are involved in the production of haram items and services such as:
- Alcohol and smoking products
- Meat products not slaughtered in a halal way
- Weapons of mass destruction
- Lottery tickets
- Machines for haram purposes such as gambling machines
- Hoarding of food items for the reselling them at a higher price
- Entertainment such as movie theatres, music, hotels, etc.
- Investing in companies that provide insurance services is also not a halal stock option for Muslims.
Now you might wonder what investments are considered to be halal if the above principles rule out many industries? Here are a few examples of industries that comply with shariah rules and offer halal stocks for Muslim investors:
Examples Of Industries that Are Usually Halal
- Real estate
- Transportation and shipping
- Medical equipment
- Pharmaceutical companies
- Homegoods and furniture
Halal vs Normal Investments: A Short Differentiation
This part of the article summarises the above texts to provide you with a clear distinction between a halal stock and a normal one.
- Halal stocks do not provide profits in the form of interest, while normal stocks that are not permissible offer profit earnings as riba or interest.
- Most companies that provide normal stocks are involved in unethical practices such as speculation and others. In contrast, halal stocks are from companies involved in ethical practices.
- Investing in halal stocks ensures a mutually benefiting partnership, and investors are obliged to share the loss and profits. On the other hand, normal stocks are only based on personal gain and exploits through a profit-only investment system.
- Many available normal stocks belong to companies that promote sales of haram products such as alcohol, insurance, etc. In contrast, halal stocks protect Muslim investors from companies that produce haram services or articles and encourage them to invest in ethical businesses.
- Furthermore, normal stocks might contain the element of gharar, whereas halal stocks do not consist of it and are known.
Do halal investments make less than traditional investments?
The answer to this question is yes and no. It depends on the type of investment you choose, its risk drawdown, and market conditions.
For example, if you’re comparing investing in a halal stock vs investing in a non-halal ETF, in a bull market, you can assume that the halal stock will make more than the non-halal ETF.
However, the risk you’re exposing yourself to when investing only in single stock as compared to an ETF is significantly much higher.
Next comes the question, what if I compare a halal ETF vs a non-halal ETF? Who would perform better?
The answer to this comes back to the risk you’re taking.
In a halal ETF, the companies do not use debt to grow – so you’re at a “disadvantage” when it comes to potential returns.
In a non-halal ETF, companies can leverage on debt to bring in much higher returns, but the risk of using debt financing is significantly higher as well.
In good market conditions, it’s presumable that the non-halal ETF can perform better.
In bad market conditions, you can presume that the halal ETF can perform better – simply because they’re not tied by debt obligations.
This is just a generic explanation, but I hope you get the gist of it.
Remember, investing is not just about how much you’ll make.
It’s also about how much risk you’re taking to make those returns (aka your risk appetite).
Until now, we have learned about different types of investments and what is considered haram and halal stocks. The main question that arises is, what can I invest in?
What can I invest in Islamic finance?
Stocks are also referred to as a measure of equity.
This is the type of investment in which an investor purchases and owns a fraction of a company/corporation. You can own stocks of either a single or multiple companies.
They are primarily purchased and sold through the stock exchange. In simple words, owning a stock means that you own a part of that particular company.
An investor who owns stocks gains profits from it when the value of that particular company increases, which increases the value of the stocks at the same rate.
But if the value of that company decreases, the stock also falls, resulting in a lesser earning from it. The stock market includes both haram and halal stocks, which you need to research before investing.
To further enhance your knowledge about stocks and how they work, read more from here.
ETF stands for Exchange Traded Fund. It is a fund consisting of multiple financial securities that track the performance of a certain index or commodity.
An ETF is traded like any other security on the stock exchange.
Think of it as instead of purchasing a stock, you, along with other investors pool money to purchase multiple stocks in that fund.
These are a great way to diversify your risk and is one of the most popular asset classes.
An ETF that is halal ensures that the companies in the fund are Shariah-compliant as per the guidelines mentioned above.
Halal Mutual Funds / Unit Trusts
A mutual fund is a collective pool of money invested by several people. They are highly similar to ETFs, with a key difference.
These funds are managed by professional fund managers who use their expertise to make sure that the money is used effectively.
This means that they will actively look at the assets in the fund and make adjustments to them so that you can make higher returns.
However, the tradeoff to this is that the fees are usually higher as well.
Similar to halal ETFs, a halal unit trust is just a fund with Shariah-compliant stocks.
REIT stands for Real Estate Investment Trust. This is a form of real estate where shares are bought and sold on the stock exchange.
It is similar to a mutual fund, but unlike a mutual fund, it invests all its money into real estate.
It is a good option for those looking to invest in property or even receive dividends from their investments.
For a REIT to be halal, it has to adopt the halal investing practices as previously mentioned.
A bond is a financial certificate type of investment that contains the element of debt ownership.
This kind of investment consists of a loan given to a borrower, usually a corporation, municipality, or government, to fund its operations for a certain amount of time.
In return, the investor receives money in the form of interest over the borrowed loan.
To make it easy to understand, investors purchase bonds issued from specific borrowers as an investment.
The bond acts as lending loans to fund the issuer for their goals for a certain amount of time. In return, the bond provides profits in interest to the investor and helps increase their wealth.
However, its market value can change over time which may fluctuate the amount of profit received.
You can read more about bonds to understand further what they are and how they work.
Take note that bonds are not considered Shariah-compliant, however, it’s important for you to know this before we talk about your next option.
Sukuk is a type of investment quite similar to bonds. But the distinct difference between the Sukuk and bonds lies in how they function.
A bond is considered a non-shariah-compliant investment since the investor receives interest from the loan given to the bond issuer.
On the other hand, a Sukuk is shariah-compliant, which means it is a permissible investment and an alternative to bonds for Muslim investors.
Sukuk, also referred to as Islamic bonds, are Islamic financial certificates that are asset-based and belong to the fixed income market.
The investor partially owns an issuer’s asset until the Sukuk matures and generates income without involving any interest.
Halal investments are a good investment because they are considered permissible by Islamic law and are ethical investments.
However, as with any other type of investment, you need to do your research before making a decision.
As a retail investor, you can look for these assets on a brokerage account in Singapore, or seek advice from a financial advisor if you’re unsure.
I hope that this article has been helpful for you!