Halal investing principles
There are guidelines you say? Read on!
Salaam readers!
As Muslims, we have criteria that we need to adhere to when trying to grow our surplus money in the short or long term. To many people, halal investing just means to stay away from interest, but that’s far from being all there is to it. There are numerous investment options that we have (to be covered in future posts) such as stocks, mutual funds, index funds, REITs, physical real estate property, startups, the list goes on….For all of them, there are a few primary considerations or guidelines that we need to take into account as halal investors seeking to handle our finances the right way.
Once again, although we have explicit ayat in the Qur’an that tell us what to stay away from in our dealings, not all are. This leaves room for reasoning for the educated and informed Muslim. With that, Islamic finance principles of investing are set by Shari’ah experts (Islamic scholars) based on deep combined knowledge of the Qur’an, Sunnah, and/or ijtihad or idjma (both reasoning, be it by group consensus or individual inspiration). There a few institutions that make the process of common understanding and guidelines easier and AAOIFI is one of them. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a not-for-profit organization founded in 1990 to maintain and promote Shari’ah standards for Islamic financial institutions. AAOIFI includes scholarly opinions from several Muslim schools of thought and is generally considered to be the gold standard for Islamic finance rules.
AAOIFI rules for halal investing are as follows:
Business screen: Filtering out companies or other investment vehicles that profit from interest, alcohol, tobacco, gambling, adult entertainment, insurance, and weapons. These investment options should also be ethical (tayyib or pure). That is, investing in companies with core human, animal, and environmental values is equally as important. As Allah (swt) says in the Quran, “O you who believe, do not wrongfully consume each other’s wealth” (Qur’an 4:29). We should at all all costs avoid saving, spending, and investing in/with places that violate God’s creations’ rights.
This plays out well with the recent Ethical, Social, and Governance (ESG) and Sustainable Responsible Investing (SRI) trends from corporate America…but Islamic rules have been saying this for more than 1,400 years!!!
Noncompliant income: The investment vehicle’s (let’s just say company to make this easier) noncompliant income as a percentage of total income should be less than 5%. Noncompliant income includes interest income and income from sources that do not pass the business model screen above.
Cash and interest earning deposits should be less than 30% of the company’s total market capitalization/traded equity (this means that most if not all banks and financial institutions are inherently not halal investment options).
Interest-bearing debt to average market capitalization: Ensuring that the company is not involved in paying too much debt is another criterion under AAOIFI, being required to be at <30% of the total market capitalization of the company.
There are other institutions such as the Dow Jones, S & P, FTSE, MSCI, and SC Malaysia that have their own criteria. However, all follow the principles of the business being fundamentally in line with Islamic rules, limited involvement with non-compliant income if at all, and very low debt and interest levels. Bonus, the companies that meet the above criteria have historically outperformed the others during financial crises!
Lastly, we need to purify our wealth from the non-halal portions of these investments. Any income such as dividend income generated from the interest earning and other non-compliant income is donated to charities without any expectation of reward from Allah (swt). We’re simply disposing of it.
**If you’ve read up to here, I need you to comment “BLUE” down below :)
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