Investment

So You’re Looking For a Halal Investment? Let’s Take a Look at Shares & Forex

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[av_textblock size=” font_color=” color=” av-desktop-hide=” av-medium-hide=” av-small-hide=” av-mini-hide=” av-medium-font-size=” av-small-font-size=” av-mini-font-size=”] So you have a few quid sloshing around in your bank account (Islamic of course) for the foreseeable future and you’re thinking of investing it somewhere that offers a better return than your standard Islamic Bank ISA.

*Update: Read our guide on how to screen for sharia-compliant shares.*

*Update 2: by popular request, we’ve developed a complete guided masterclass on screening for halal shares. If you’re put off investing because you’re worried about sharia-compliance, this is the class for you. Click here for full details.*

But when you start looking the whole thing is a minefield. For a start its hard to pick through where you should be investing, what assets, for how long, with the cheapest brokers, and at what risk, and on top of all these usual concerns you also want your investment to be halal.

So let’s do a quick run-through of the two most common easy-to-access places you can invest money in and the Shariah rulings regarding them: Shares & Forex.

Shares

Shares are okay per se to invest in as they are simply seen as owning a percentage in a business. The obvious thing to watch out for is that the company should not be dealing in unislamic things. So you couldn’t go along and buy shares in Lloyds TSB or Heineken for example (you can read our guide on how to screen for sharia-compliant companies here).

But you all knew that right?

The real question is what do you do when a company deals in some unislamic things and some unislamic things? Two things:

  • Firstly, if a company deals in mainly unislamic things then it is deemed unislamic and you shouldn’t invest in it.
  • Secondly, if a company deals in only a fraction of unislamic things (e.g. less than 10%), then lots of scholars have said that it is okay to invest in these companies and give away that percentage of the profits that accrue from the haram section as charity. More precisely, if you know 5% of a company’s profits derive from alcohol, then you give away 5% of profits you receive.

The second big issue is how much cash/debt does the company have?

  • Islamically we don’t want to trade in interest of course, and that means we need to exchange £50 for exactly £50. But in certain shares, as the price fluctuates for the cost of the entire company (as the stock price varies) you end up paying more or less than par value for the debt/cash.
  • So let’s say for example a company has £1000 in cash on its accounts and that forms the majority of its value, and then the stocks of the company trade at £50,000 in total – you’re paying more than par value.
  • The way to avoid this kind of situation is according to scholars that you avoid companies who have large debt/cash piles where the majority of their stock value is due to this, but go for companies where in fact the value is due to the value of their broader business.

There are Islamic stock indices that screen companies for this sort of thing so that you don’t have to do the digging on this – but these screens are typically quite expensive and designed for the institutional Islamic investor. However for the private investor all is not lost. It is quite easy on most online share trading websites to get a snapshot of the company, how much debt they are in, what is their market capitalisation, and even their accounts. Read our guide on how to screen for sharia-compliant shares.

It really just comes down to being a bit sensible and using your common sense. Investing in a heavily leveraged company that sells beverages including alcoholic ones is probably unislamic, while investing in a pharmaceutical company which makes the majority of its money from drug sales is okay.

Contrarian opinions on shares

There are a number of people who have adopted different opinions on share trading and regard it as unislamic. However these are either weak opinions or do not understand the investment context (part of a wider problem of scholars not being well-grounded in finance when it comes to Islamic Financial rulings).

Some people say “Share prices are speculative and so investing in shares is gambling”. They say this because a “share” is not priced at the exact value of a company. Let’s say a company owns £500 worth of machinery and £1000 worth of land – the share price of that company should presumably be £1500, but its not. This, these people argue, means that shares are a form of gambling. However they fail to understand that a company’s worth is not just achieved by adding up its constituent parts, but in fact goodwill, brand name, and a whole host of other things come into it too. So it is fine for a company to be worth more than its constituent parts.

Other people say “shares are not actually “ownership” in a company and are merely a bundle of rights to things like voting at AGMs, having a right to dividends. and getting updates from the company on certain matters. It doesn’t entail ownership of the company. Therefore, shares are buying and selling a bunch of rights and is haram.”

Firstly, this argument is wrong because ultimately what these rights are giving to the shareholder are exactly those rights that define an owner – ultimate control on key decisions and a right to profits. Secondly, they are also likely wrong on the point about selling rights. But more on that in a later blog.

VERDICT: GENERALLY FINE, JUST DO YOUR RESEARCH ON A COMPANY PROPERLY

Two introductory books I highly recommend on learning how to invest are: Intelligent Investor: The Definitive Book on Value Investing – A Book of Practical Counsel” target=”_blank” rel=”noopener”>The Intelligent Investor and The Long and the Short of it: A Guide to Finance and Investment for Normally Intelligent People Who Aren’t in the Industry” target=”_blank” rel=”noopener”>The Long and the Short of it.

Forex Trading

Forex trading is very easily accessible online and the allure of quick money is there with their slick advertising promising you millions. Again, from the outset it also looks halal as you are apparently just trading in money – which is perfectly fine.

However all is not what meets the eye.

It is true that if you buy £5000 for $3000 and then a year later you sell it for $4000 as the pound appreciates against the dollar, this is perfectly halal transaction and there is nothing wrong with that.

However Forex trading is not that. It is not that for a number of reasons:

Firstly, in order for someone to make money on currency markets which move daily just fractions of pennies in price, you have to be investing huge amounts – we’re talking hundreds of thousands per trade – for it to have a discernible profit.

So let’s say the GBP strengthens against the USD a cent for every £, if you invested £1000 you would make $10. Not very much is it? Now if you invested £100,000 in the same trade, you would make $1000. Much more substantial.

So these forex companies give you access to “leverage” which means that for putting up every £1 they will let you invest £50 or even £100. That means that with a very small amount of money you can take very large positions in the forex market. This magnifies both your profits and losses.

Again, nothing wrong with this per se. In Islam you can borrow from someone, and then use that money to invest, make a profit, and return that loan interest free to the creditor.

But there is something very subtle which makes this haram in the context of forex. In forex these companies are lending you this money for the sole purpose of you then using that money to enter a trade with them for which they will get a commission. In other words they are getting a set return from every loan they make. This is understood by scholars to be a form of interest, and so the whole transaction is haram.

N.B. Some companies erroneously advertise a “shariah-compliant” forex account where the user will neither get nor have to give interest on their money in their accounts in a “carry trade”. Of course Islamically this is good and would be part of a Shariah-compliant currency trading account, but it does not deal with the fundamental problem of the way the transaction works which I noted above. So don’t be duped by these accounts. To my knowledge there are no currently available “Islamic” forex accounts for ordinary investors available.

(One possible way of structuring a Forex trading platform to make it shariah compliant would be to divorce the source of the loan and the platform on which you trade. So if you loaned money from x and then used broker y to enter into the forex transaction, with no link between x and y. But this would require some legal/Shariah wizardry – your thoughts on this welcomes though!)

VERDICT: NOT SHARIAH COMPLIANT AS IT IS.

In part two of this blog I will cover other popular ways of investing money such as Spread Betting, Bonds, ETFs, Pension Funds, Options, Futures, and Forwards. So watch out for that in the coming weeks.

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47 Comments. Leave new

  • Really helpful, thank you! Can you please do a similar one for Bonds and ETFs? And possibly shed some light on the S&P 500 Shariah Index?

    Reply
  • Ibrahim Khan
    June 12, 2016 11:56 am

    There has now been a new post on this:
    https://www.islamicfinanceguru.com/2016/03/30/islamic-finance-assessment-modern-retail-fx-industry/

    This new post has an evolved position on the matters discussed above in the forex section.

    Reply
  • Thanks
    How can I as non Malaysian resident invest my money in Malaysia?

    Reply
    • Ibrahim Khan
      July 20, 2016 7:56 pm

      short answer – no idea. I’m afraid you’ll have to go elsewhere to find expertise on that matter!

      Reply
  • Having previously thought investing money in a halal manner is too tricky a task to manage in today’s intricate markets, this was a very useful blog post! Nice to see simplified Islamic stances on commonly misunderstood issues – curious to know which scholars you consult on the matter?

    JazaakAllah khair!

    Reply
  • Thanks for the help! Have you discussed Option trading in any posts yet?

    Reply
  • What I liked about this article was it took something that was complicated to under for me and broke it down into and easy to read article with practice examples. JazakAllah khair!

    Reply
  • Muazu Ibrahim Muazu
    October 5, 2016 5:22 am

    Jazakallahu bi khair my research so far has confirmed what you stated above and I have found it informative especially from a review stand point.

    Reply
  • Assalamalaikum.

    Great article thanks and appreciate you keeping it simple.

    On the topic of calculating the cash to debt ratio, could you please look at an example company information here and provide some details of which values one should be considering when determining the ‘halalness’ of a stock?

    https://uk.finance.yahoo.com/q/ks?s=EZJ.L

    Reply
    • As salaam alaikum. I agree that some more specifics are needed on this. I was trying to find another article that had something on this (that I previously had just skimmed and didn’t fully absorb) and found out there’s an app where you can look up sstock symbols, so this may be helpful to you, inshallah. May Allah put baraka in your rizq and enable you to benefit from in in the dunya and akhira, and the same for everyone else seeking or providing information on halal investing. Amiin.

      Reply
  • Hi
    – is Binary options halal/ haram?
    – what online trading can we as muslims do (can you provide references)

    Reply
    • I’m not familiar with binary options trading. From a quick google search of what it is, it sounds very very dodgy and akin to gambling.

      We can do online stock trading at the very least.

      Reply
    • Confused : is it halal if yes I am south African how do i start

      Reply
  • What if I open a forex trade at morning and close at night, this does not incur any charges from the broker. Is it Halal?
    Or if my broker does not charge interest rate on Islamic account but instead charges a higher fees for the transaction?

    Reply
  • Salam, if i trade shares on a trading site and buy for 100$ by maintaining 50$ in the account and sell the share later on knowing that i can top up to 100$ whe required. Is this halal.
    All the trading sites give leverage option even if u have the money to buy X number of shares….

    Reply
    • That’s a very interesting question. The first thing is this is not short-selling – which is leveraging going down. That is quite clearly not permissible. This issue is essentially one of buying on credit. I’d have to look into this a bit further/think on it, but I would suggest that if you’re being charged interest for liquidity by the stockbroker – then that is not permissible. However if there is no actual borrowing, then this is largely analogous to buying on credit and then making good the difference to the seller after you’ve sold the goods on and raised the liquidity.
      What do you think?

      Reply
  • AssalamuAlaikum brother,

    Is it halal to do forex trading online without taking any loan from them?
    I read the fatawas of Mufti Taqi usmani and Mufti Ibrahim desai that forex trading is not permissible.
    Some scholar gave the reason that the trader does not take the full possession of the currency.

    Reply
    • I have not entirely made up my mind about the topic. This is certainly an area I want to look into iA. Gut instinct is that given there is certainty in the trade, and as modern finance requires constructive possession rather than actual possession, this is not as big an issue as on first glance. But watch this space. I will get around to looking into this eventually!

      Reply
      • Does the trader take constructive possession of the currency he buys before he sells it to the market without any conditions?

        Do you not think it is a بيع و شرط or بيعتان فى بيعة ? Which is prohibited by رسول الله صلى الله عليه وسلم ?

        Please enlighten me with your research.

        Reply
  • You people are so deluded into thinking that if it deals in less than 10% of haraam activities or has less than 33% debt to equity ratio it’s fine as long as you give that proportion out of the dividend to charity. That is the biggest bunch of BS I’ve ever heard and it is all part of your rationalization.
    Let me explain something to you.
    The problem with that is it does not account for the appreciation of the stock that occurs when these companies grow (usually by borrowing money for expansion or short term borrowing etc.) So you can never tell what portion of the increase in the share price came from the borrowed money or income earned from haraam sources e.g alcohol.
    Dividends are only a fraction of the profit most people invest in. Most of them hope for an capital appreciation

    And as far as the whole 33% debt is fine. 10% haraam activities is fine…don’t you think the people who design these formulas have a vested interest in these schemes? They are the owners of the so called ‘Islamic investment funds’ hoping to target the religion conscious people.
    If something is haraam…a little of it is haraam just as much.

    Saying bismillah before drinking wine does not make it halal and neither does slaughtering a pig with Allah-o-Akbar make it edible. Just like that there is no such thing as ‘Islamic Banking’

    Reply
    • Ibrahim Khan
      April 1, 2017 10:39 am

      ignoring the unduly hostile tone of the comment, your point is prima facie a valid one. The problem with it is that by extension the implication of your argument are:
      1. Muslims cannot invest and/or have an effective pension;
      2. Muslims cannot work in (and by consequence support) a conglomerate that has, at some point in its chain, unislamic practices.

      Your approach would work in an ideal world. Given we are patently not, it is naive.

      Reply
  • Salaam,

    Would you be able to comment on the status of ETFs and REITs. Is there anything in principle wrong with using an ETF if it tracks an Islamic index such as the IShares MSCI USA Islamic UCITS ETF (LSE:ISUS)? Also, would using a sector ETF such as the Vanguard Healthcare ETF (NYSE:VHT) be acceptable providing that one conducts a purification on the returns? Furthermore, would REITs be an acceptable way of accessing the real estate market, such as British Land (LSE:BLND) and Land Securities (LSE:LAND) which current trade at a discount to their net asset value. Moreover what would be the status of a REIT ETF like the Vanguard REIT ETF (NYSE:VNQ).

    I’d be very grateful for your advice,
    Jazaakumullahu Khayran

    Reply
    • Mohsin Patel
      July 11, 2017 10:55 am

      Ws Osaid,

      Thanks for getting in touch.

      There are a few points within your comment so I’ll just number the issues for ease of reference.

      1. ETFs tracking an sharia-approved Islamic index are fine.
      2. A sector-specific ETF would need a full analysis of the individual components to assess overall sharia compliance of the ETF. Purification might or might not work depending on what % of the ETF is deemed to be non-halal income.
      3. REITs can work in theory, but in reality need to be broken down and assessed for sharia compliance. REITs specifically are tricky because they from a sharia compliance perspective they face financing questions, as well as issues surrounding the individual components within the REIT and the permissibility of them as a source of income to the REIT as a whole. In short, a sharia-compliant certified REIT is fine, but beyond that it needs a full analysis.
      4. My understanding is that buying stuff which is trading at a discount to NAV is fine, it’s the calculation of the NAV that can be trickier. For instance, the value given to a particular asset on the financial report might be less than the actual market value (herein lies the opportunity). What you do need to be aware of though is that net liquid assets cannot be less than the market cap. Net liquid assets is: total assets – (tangible fixed assets + inventory) – Liabilities.

      I hope this helps.

      We can of course assist with this via our consultancy and advisory service.

      Kind regards,

      Mohsin

      Reply
  • What if you were to not use leverage in your trade? Despite making tiny amounts of profit..

    Reply
    • If the source of the leverage is halal (e.g. an interest-free loan) then it is fine. But if the leverage is interest-based, clearly that is problematic from a fiqhi perspective. The fact you would end up with less profit overall without leverage is not an argument for allowing leverage.

      Reply
  • Salam, thank you for your valuable advice so far. I’d like to ask can Muslims invest in unit trusts where the components are largely halal but has a small percentage invested in non-syariah compliant companies? Is there a percentage threshold to be aware of? Thanks so much.

    Reply
  • Salaam, do you have an update on whether forex is permissible based on not taking ownership of the underlying asset.

    If you look at a simple definition of spread betting and CFDs from Investopedia they state:

    CDFs and spread bets are leveraged derivative products whose values derive from an underlying asset. In these trades, the investor has no ownership of assets in the underlying market.

    So would this fall under constructive ownership as companies such as IG usually state you don’t own anything or is it just impermissible.

    Reply
    • Ibrahim Khan
      May 7, 2018 6:15 pm

      CFDs and spread bets are unambigiously impermissible. On FX there is more room for debate – and there is an article I am working on for that.

      Reply
  • Salam, thoughts on stock options? I’ve read in some places that both puts/calls are halal, only calls, and neither.

    Reply
  • Spreads. The difference between the bid and the offer. They exist for both shares and Forex. Seeing as these, for the most part, are there all the time, do they make a transaction halal or haram.
    Also regarding leveraged trading products. If you are trading, on margin then you are borrowing money from the broker. The broker WILL charge interest if the trade carries over. However, it’s my understanding, and please correct me if wrong, that if you trade on margin and close the trade on the same day, before the carry over time, no interest is occured.
    Finally, please confirm, short selling of ANY kind, is haram? Long trades only.
    Im not actively trading, dabbled a few years ago but the uncertainty over halal/haram put me off and decided to stay safe.
    Jazakhallah Khairun.

    Reply
  • masiulla khan
    July 31, 2018 2:09 am

    Assalamalaikum wa rahmatullahi wa barakatuhu , Sir is there any stock broker or consultant dealing in halal tradiing in hyderabad with whome i can connected in trading stocks, i am already trading stocks and need some help in this regard, please. Thanks.

    Reply
  • Aqeel ahmed
    July 28, 2019 9:40 am

    Salam there’s sharia supervisory board in internet world who regulate the broker they monitor brokers work in Islamic account ava trade is one of them who got a seil from SSB plz research on this do we trade with SSB regulated brokers ??

    Reply
  • Is it okay to invest in Leverage ETFs like LABU, Or Crude based UWT. Also please mention if the inverse of these are okay or not (LABD/DWT). JazakAllah

    Reply
    • I assume they are using haram leverage? If so, then try and find out what % they’re leveraged at. You could argue that a minimal % you can get away with (and purify that element) but in my humble opinion, better to avoid altogether to be honest.

      Reply

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