What is a halal investment?
Halal means ‘permissible’/‘lawful’ and an investment is an asset or item that is purchased with the hope that it will generate income or increase in value in the future.
In order for an investment to be halal, it must be compliant with the regulations and principles set out by Islam in the Quran and sunnah (known as ‘shariah law’).
There is nothing inherently haram (impermissible) about earning money through profit distributions from business activity or from the increase in value of an assets.
The halal investment criteria
The investment must not generate interest (riba).
Investment cannot be made into forbidden assets/illicit activity (e.g. drugs, alcohol, pork, gambling, pornography).
The total amount of income from interest and non-compliant activities should not be more than 5% of the total revenue of the company.
Investment cannot be made into a company operating with significant debt.
No more than 33% (some say 30%) of the company’s value (determined as ‘market capitalisation’, which is the total market value of the company’s outstanding shares) should be in interest-bearing debt.
More cautious halal investors will avoid companies with any interest-bearing debt, though these opportunities are harder to find. Others prefer to consider the social good the company is achieving when deciding whether the level of interest-bearing debt is tolerable.
Halal investing, by setting a higher standard, limits the possibilities for what can be invested in.
The following options are not inherently haram and, so long as the specific opportunity is halal, can be engaged with:
Sukuk (Islamic bonds)- because conventional profit from interest).
Valuable assets like precious metals.
Venture Capital firms; (such as IFG.VC)
You can compare between all your options using our Halal Investment Platform here.
Benefits of investing in a halal way/Beyond the prohibitions
Muslims are expected to be sources of goodness. That social responsibility also extends to how we invest.
By not accepting the profit from riba, investments become mutually beneficial rather than merely opportunistic.
By not investing in forbidden industries, we are not encouraging and profiting from the increase of immorality or harm.
By avoiding high levels of debt, we do not encourage excessive risk-taking in society.
Halal investing is more than just prohibitions, it must also involve a vision of hope and a desire to promote good. Muslims are told as much in the Quranic ayah:
“You are the best community singled out for people: you order what is right, forbid what is wrong, and believe in God.” [3:110]
This article is part of the Islamic Finance Definitions Series.