Halal Investments and structuring a Shariah-compliant portfolio

Given the popularity of our previous article on halal investments (exploring forex and shares as an option) we thought it would be useful for our readers to expand on the whole theme of investment and savings and how to go about building a successful Shariah-compliant portfolio.

There are two main things to remember when it comes to building a portfolio. First, there is choosing the correct asset. This involves researching the fundamental case for investment, the risk/reward ratio, liquidity, etc – this tends to be the bit that most people see as the main part of investing and so they don’t overlook this part.

However, there is also a key concept known as portfolio management This is taking a step back and assessing the makeup and risk profile of your portfolio as a whole – assessing if you have diversified sufficiently or not, and thinking about the overall strategy that is guiding all your investment decisions. This is the bit that most people forget.

So, for instance, if your overall ‘pot’ is, say, £50,000, there are lots of way you could divide that money up. You could allocate 50% of it to fixed-income products, 30% of it to equities, and keep 20% as cash. This make-up is by no means good or bad, it’s just an example of starting to think about portfolio management as a whole, and getting used to the idea of ‘splitting up’ your portfolio depending on your risk strategy.

This article is all about looking at this second strand, outlining what a healthy well-balanced, well-diversified portfolio looks like, and then discussing how to achieve that in a Shariah-compliant way.

This is a topic close to my heart right now, as I transition from a single early-twenties guy into a married man looking to start a family. My portfolio right now is very much on the high-risk end of the spectrum, but naturally, I am now reassessing my portfolio in light of my life changes.

What does a well-balanced portfolio look like?

There is a lot of theory that goes into this, and many PhDs have been written on this precise topic but broadly, there are three constituent parts to any portfolio:

  1. Equities
  2. Fixed income products (e.g. bonds, gilts)
  3. Cash

Equities are the highest risk, as one always runs the potential of losing everything; fixed income products are much lower risk and offer a fixed return; cash is…well…cash. It’s the safest option out of the three, but the option that makes you lose in the long-run due to effects of inflation devaluing the cash.

I’m going to assume that you’re sensible enough to know what you need to hold in cash in your current account to meet your very short term needs, and we will focus on the first two elements as the sole constituents of your portfolio.

What percentage of my portfolio should I assign to each of these sections?

In the classic text on value investing by Benjamin Graham, “The Intelligent Investor“, he outlines that his portfolio makeup would vary depending on whether or not he thought equities were overpriced or not. When he thought equities were overpriced, he would recommend holding up to 75% of his portfolio in bonds, with just 25% in equities. However, at a time when equities are under-priced he recommended going 75% equities and 25% bonds and cash.

The point is simply that when equities go low-risk, stock up on them as they offer better earnings and capital returns. When they are high-risk (i.e. they might fall very shortly) then sell them and move your money into the much safer, though lower-yielding, bonds market that pays a fixed interest rate. And the way to work out “overpriced” or underpriced”? Read Ben Graham’s book – or any other reputable value investment book.

Hang on – you said “interest rate”. That’s not allowed right?

You’re quite correct. Standard bonds are basically an IOU. You lend the Government/company a £100 and they promise to pay you back that amount after five years, but in the interim they will pay 2% interest a year, for example. Then at the end of the 5 years they also pay back the £100.

This is just a straightforward interest-bearing loan. It’s very low risk and its very predictable. And a good portfolio needs something like this in there.

So is there a Shariah-compliant way of achieving this?

Yes. Here are some options:

  • Sukuk. These are an Islamic equivalent to bonds (it’s a lot more complicated than that, but take my word for it for now. This is perhaps an area we will revisit in a later article if the interest is there). They pay a fixed return over a certain term and then you are returned your original investment. There are really Shariah-compliant sukuk and less Shariah-compliant sukuk. But for the purposes of most ordinary investors, you aren’t going to be buying it as they are sold in denominations of tens and hundreds of thousands.
  • Savings accounts at Islamic banks. This is not as stupid an idea as it initially sounds. Islamic banks are amongst the highest paying savings accounts across the UK, especially when you agree to lock away your investment for a minimum period of time (e.g. 6m, 1 year, 2 years). But still, you may not be happy with the yields offered.
  • Real estate. If you’re looking for a better return than a savings account but less risk than equities, then a buy-to-let model might be a good fit for you. A well-structured portfolio of residential and commercial properties can yield upwards of 10%. Even a very simple buy-to-let without any extra work on the property to maximise yield, will yield around 4-5% of the total value of the property, as that is the average rent across the UK.

However do bear in mind that real estate is not as safe as a savings account – or as low-hassle. You will have to either manage the letting yourself, or give an estate agent a cut to do it for you. You will have to deal with periodic repairs. You will also be exposed to the vagaries of the rental and property market, as well as, of course, the luck of the draw with the kind of tenants you get. You might have to pay the bills, including council tax. Having said all that though, the return is still pretty stable, but it’s not as stable as a bond or a savings account.

  • Property websites. One way of mitigating the risk of putting all your eggs into one buy-to-let property is by buying a stake in lots of different properties. These set-ups are also quite good in that they usually manage the whole thing themselves. You are kept at arms-length the whole duration of your investment. The not-so-good thing is that they take a big cut of the profits, and you’re going to have to work with other partners who also own the property. Their big advantage though is that they are easy to get into and don’t require saving up for a big deposit, nor do you have to take out a mortgage (halal or otherwise), however what you will need to do is look at the type of investment you are getting into as some property websites offer things like fixed returns on a property loan which are not ok.

Concluding remarks

  1. There is obviously a bit of a gap in the market for small denomination sukuk. If any of you guys know someone who is offering this – please do comment in the discussion below and let us all know.
  2. This article will have got a lot of people thinking about their pension – which will inevitably have some bonds involved (see our previous article on pensions here). Don’t worry, this is a big topic in itself and deserves an independent article or two. Suffice to say pensions are never easy to understand, and certainly not with the added complication of wanting it to be Shariah compliant.
  3. You will have noticed that I’ve not said much about equities in this article. This is as I’ve already discussed them in length in our original article (here). But there is a second issue which I haven’t really discussed – and that is the issue of risk, and if it is acceptable to buy shares speculatively, and if it is acceptable to buy high-risk shares. These questions are deferred for another article.

Please note that the above does not constitute financial advice. You should seek the advice of a qualified, independent financial advisor for a qualified opinion. Never buy shares without conducting sufficient research.

Look forward to all your thoughts below! Also, I realise this is a topic that’ll trigger quite a few questions. Fire away, I’ll give it my best!

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10 Comments. Leave new

  • JazakAllah khayr.

    Can you talk a little bit more about the financial screens for stocks? I looked at teh original article from Oct. 2015, and it seems to be silent.

    Primarily, I’m interested in knowing how to calculate total debt – is it a simple issue of looking at the total liabilities, or do we only count ST (or LT) debt, ignore taxes, etc? What about the trailing 12/ 24 month rule… does that matter?

    It would be helpful if you could use a company as an example and advise which numbers to look at, and how to calculate this stuff.

    Barakallahu feekum.

    • Mohsin Patel
      May 5, 2017 8:13 am

      Great question.

      This whole idea of screening stocks is something we are working on in and insha’Allah in due course you will hear more.

      With regard to your specific question, I am aware of one particular board (chaired by Mufti Taqi) who hold that a ‘debt to total asset ratio’ is important here. This is done by taking the total amount of interest-bearing debt and dividing by total assets. This should not exceed 33%, according to the board.

      The amount of interest-bearing debt specifically might not be explicit in the accounts. I suggest that you look at long-term liabilities and then work from there on the website, news releases, corporate presentations by the company, etc, to work out how much of that long-term borrowing is actually interest-bearing debt (because it might not necessarily be interest-bearing debt). If you cannot work it out, you can call the company’s investor relations department and try to ascertain the figure from them.

      Total assets will simply be taken from the accounts.

      I hope this helps even though it is not definitive. This is very much an area without definitive guidelines.

      • Salaam

        Thanks for the quick reply. So, just to make sure I understand:

        the debt : asset ratio is the way to calculate the the debt portion of the financial screen; it’s not an additional variable.

        also, when looking at the debt : asset ratio, it’s the long term liabilities only that we’d look at (actually the focus is on interest-bearing liabilities), but that means short term liabilities would not contribute to the overall debt of a company?


        Asking also because there are a lot of value-based, dividend paying companies like telcos, utilities and railroads that have seemingly high debt ratios, but their debt is split across various categories… potentially making them halal to invest in, on a case-by-case basis. dunno.

        Will look forward to your series of articles that explain the concepts in more detail…. wsalaams

        • Mohsin Patel
          May 18, 2017 5:23 pm


          I suppose the term ‘debt:asset ratio’ is a misnomer if I have correctly understood what Mufti Taqi is really driving at. It should be termed ‘interest-bearing liabilities:total assets ratio’.

          With that in mind, it wouldn’t only be long-term liabilities. I suggested you start from there (as that’s where the bulk of the interest-bearing stuff will be, but not always). In truth, you will have to comb through the entire accounts, including the notes, to extract what exactly there is that is interest-bearing borrowing. There might well be short-term interest-bearing loans in the short-term liabilities section if that debt is maturing soon, so you should absolutely look there. But, to be clear, *not all debt is interest-bearing* so you will have to look at the detailed accounts.

          I’m not sure what you mean by the dividend-paying companies having debt split across various categories, but maybe the above will help you to simplify your approach. If you still aren’t clear, I’m happy to continue this discussion.

  • EDIT to above comment:

    Second paragraph should ask whether “non-interest bearing liabilities do not contribute to overall debt of a company”?

  • Salaam. I’ve been researching a lot lately with regards to Islamic investments and have found it quite a task coming up with a strategy that would meet the balance that i am seeking, being – shariah compliance, and a form of investment that doesn’t take too much maintenance. I accept ROI with above criteria may be less than if i was more actively involved but given other commitments, i just want something more flexible and something that would provide more than than the 2% Al Rayan are offering for locking money away for 36 months.

    Sukuk, seem to me the most sensible choice here with the major barrier to entry of not being available in smaller denominations much like bonds are, which you’ve mentioned already.

    Failing this, what are the other options out there if the amount i want to invest is say up to £20k? I’ve toyed with the idea of shares but then (also read your article on diversification) i would want to diversify into 3-5 shares, would have to do my due diligence, check on the shariah compliance aspect, check it is a share i’m allowed to invest in (I work at an accounting firm), and the small matter of working out the amount i need to give away to clean my earnings from interest income (the practical aspects in a step by step guide format of all this may also be an interesting blog post idea?). Are there any other alternatives that you think may be worthwhile researching?

    • Mohsin Patel
      May 18, 2017 5:18 pm


      The first thing to say is that none of this (or indeed anything on this site) is to be taken as financial advice, and that you should seek the opinion of a qualified financial adviser who is authorised by the FCA to give financial advice.

      If I were in your shoes, I would say £20k is a decent sum to invest and it’s absolutely fair to want more than 2%. Of course, your returns are necessarily linked with the amount of risk you take. Investing in high-risk activity might bring great rewards, but also comes with the risk that you might lost a significant proportion of your £20k, if not all of it! Equally, I’m assuming you don’t want something totally low risk because you are clearly unwilling to accept 2% as a return.

      Without knowing your exact situation it is hard to say, but you should of course lock some money away as an emergency fund that you might need to call on. If you could afford theoretically to lose £20k and it not debilitate you, you could go for high risk stuff. Depending on your time of life, family situation etc, you might not want to do this. You could perhaps invest in different types of shares – you mentioned 3-5 shares with your £20k so you could perhaps allocate a certain % of the portfolio to high risk stuff and put the other part of the portfolio towards safer shares.

      Purely as an example (as you will have to decide what % of your portfolio to allocate where), you could go for something like:

      £5,000 – FTSE100 stock with min. 5% dividend yield
      £5,000 – FTSE100 stock with min. 5% dividend yield
      £5,000 – mid-cap stock (say up to £600m market cap) with min. 2% yield (as you would have higher potential for capital appreciation so the dividend isn’t really the main concern)
      £2,500 – small-cap stock
      £2,500 – small-cap stock

      The above is purely an example of how you might spread out that £20k to ensure that on at least £15,000 of it, you’ve got a dividend, with the entire £20k possibly appreciating or depreciating depending on the overall performance of the portfolio.

    • 1. Islamic s and p 500 etf.
      2. Oasis crescent managed funds – there are a few
      3. Property unit trusts (like threadneedle)
      4. ARB bonds or notice accounts
      5. Gold (like GLD).
      6. Commodities (not sure about this area as not researched it yet)

      There you go – simple diversification and sharia compliantly to boot!

      You just need to figure out how much in each!

      (There is probably more out there.)

  • Great article – main point from me is that there are funds out there which do all this screening!

    Plus one can invest in gold and property unit trusts and commodities too, as well as the ARB fixed rate “bonds”.

    i.e. One can allocate assets and diversify relatively simply.

    Sure – it could be better, but seems quite good as is!


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