Is there such a thing as halal investing and is investing in the stock market allowed in Islam? One of the many ways to create wealth is by investing your money in successful companies or index funds but how can Muslims do this? More importantly, how can we do it in a shariah compliant manner? This article will show how to start your investment journey and make sure you’re adhering to the principles of Islamic finance.
Whether or not we follow the financial markets we can’t escape the news whenever a company does something big. Seeing the growth of successful companies such as Tesla or Amazon leaves us wanting to be involved in their growth. But as Muslims, for us to get involved in the stock market there are two broad screening processes that need to be applied before deciding where to invest our money.
Business Screening
Industry screening is meant to eliminate any impermissible businesses from your investment selection criteria. The first criteria is the industry or business screening.
There are 6 broad categorises of companies that are deemed impermissible to be invested in as a Muslim.
A big part of Islamic finance is that wealth creation should be coupled with businesses that are beneficial for society. The previous 6 industries have been deemed as detrimental for the population and as a result these industries or sectors should not form part of a Muslim’s investing portfolio.
Financial Screening
The second screening in Islamic finance is admittedly more difficult for the average investor to determine if it is Shariah compliant – the financial screening. Before diving into the financial criteria; it is important to understand the globalized and modern nature of the financial markets.
There is no company which adheres to 100% Islamic financial principles and as a result scholars have debated at length what is deemed suitable for Muslims. After much deliberation, the below financial criteria was agreed by the majority of scholars of what a suitable company for Shariah compliant investing looks like.
There is a repeated theme in both methods which is the importance paid to interest/riba. Islamic finance sees dependency on riba either for income or the day to day running as not beneficial to the company or society.
By relying too much on debt, it removes the company from generating revenue from their core business which is to provide a service to society. The thresholds consequently set out acceptable levels of income from debt which doesn’t take away the business’s focus on providing value to society or make it reliant on debt for the day to day running. If you’re wondering where the 30/33% criteria was inspired from, it was a conversation the Prophet Muhammad (pbuh) had with Sa’ad ibn Abi Waqqas which led scholars to adopt this threshold. When Sa’ad asked the Prophet whether he could give 33% of his inheritance away in charity, the Prophet stated, “Yes, but less is better”.
This second stage of screening is likely to put off many Muslims in their investing journey. In the upcoming articles we will be providing practical advice and ideas of how to begin your path to creating wealth via investing and give detailed reviews of existing products out there.
