Halal Investing guide
Islam is a comprehensive religion that can be seen as a way of life rather than just a set of beliefs. Not only do Muslims have to abide by widely accepted ethical values such as not lying or stealing, they also have to abide by category specific rules. One category of these rules is business transactions and investments. Islam has clear guidelines on the types of investments and businesses muslims around the world are allowed to make and not allowed to. Muslims are only supposed to be involved with halal businesses and investments.
What is halal investing?
For an investment to be halal it should not involve Riba, Gharar, Maisir or harm the society.
Riba is generally accepted to mean fixed interest. This involves having to either receive or pay fixed sums of money on an investment no matter the fundamental health of the investment. Floating interest rates are also considered riba if structured as a cost plus agreement, given the fixed nature of the markup (e.g. Libor/Fed rate + X%).
The lack of risk sharing is believed to be harmful to society. An example of this could arise when being obliged to pay fixed amounts on an investment that has not performed well. This would lead people to endure significant financial hardship, a catalyst for crime.
Muslims are however, allowed to take halal loans. Fardows is offering halal loans and halal mortgages in the US. Find out more about Fardows’ halal loans by joining Fardows and reading this article.
Gharar refers to excessive amounts of speculation/uncertainty. Gharar could exist in complicated financial derivatives but also in business partnerships that don’t have clearly defined terms. Islam bans such transactions/instruments as the riskiness of such transactions leads to very few people being able to safeguard their initial investment in the long run.
Maisir is an umbrella term to categorize the majority of gambling-like transactions. Whereas transactions involving Gharar might have some element of research into them, Maisir like transactions have minimal to none. Given Islam’s avoidance of transactions with high risk and low long term expected value, gambling is no allowed. This includes things like slot machines, poker games and paid lotteries.
Islam in general strives to provide guidance to its people on how to make society a better place as a whole, and this is strongly seen when it comes to Islamic Finance. Islam prevents muslims from engaging in any investment/business deal where a society would in total be worse off from the deal.
This ESG styled investing criteria has actually helped propel Islamic finance to be used by a relatively large portion of non-muslims due to its ethical nature. As such, muslims are not allowed to profit from industries that are considered to be harmful to society e.g. narcotics, tobacco, alcohol among others. Such prohibitions also extend to business operations by for example not allowing the exploitation of people or natural resources( e.g. child labor or deforestation).
Things you can invest in
Given the restrictions described above, Muslims can not invest in the majority of stock indexes or stocks. This is because the companies they would invest in would be generating profit by committing one of the aforementioned banned factors. This causes Muslims to underinvest their money given the huge effort required and not maximize their potential financial returns. Muslims could hire a halal financial advisor, however, they charge high fees and are not readily available.
This is why Fardows has developed a halal investing robo advisor. The halal robo advisor will only invest in Shariah-compliant halal investments for the benefit of Fardows’ customers. Fardows’ robo advisor will only be a fraction of the cost of pricey halal financial advisors and offer a better user experience.