Halal investing not only satisfies Islamic principles, but can also be just as profitable as conventional investing.
You may have heard that as a Muslim, you must follow certain religious principles when investing, and you must only stick to halal investments.
But why is there a need for Islamic investing, and how would you know which investments are considered halal?
To unravel the mystery, it is important first to understand how Islam views finance.
In the Islamic faith, money is viewed as having no intrinsic value; it is regarded only as a medium of exchange, with one unit equivalent to another of the same denomination (i.e., S$1 = S$1).
This definition, then, gives rise to some restrictions not present in secular financial systems. First and foremost, because S$1 = S$1, no one (individuals or organisations, such as banks) is allowed to make a profit by lending money or receiving money from someone.
That means interest-earning is not allowed.
- How does Islamic finance work?
- Halal vs Traditional investing
- How to find halal investments and get started
- Expected returns from halal investments
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How does Islamic finance work if interest is not allowed?
Well, to get past this requirement, Islamic finance makes use of a number of systems and frameworks to ensure flow of capital that is compatible with the secular financial system followed by the non-Muslim world.
For example, let’s consider a conventional (non-Islamic) mortgage, which is when you borrow a sum of cash from a bank to pay for your house.
Under the mortgage terms, you will then make regular instalments to pay back your loan, with interest.
If you’re using an Islamic mortgage, the bank will first purchase your house, then sell it to you at a higher price, which is agreed upon by both parties beforehand.
In this case, the bank makes a profit based on trade, instead of directly charging an interest on the loan.
There are many more financial models and systems used in Islamic banking, but our focus is on Islamic investments, so let’s move on.
Halal investments vs Traditional investments: What’s the difference?
|Islamic investments||Traditional investments|
|Cannot invest in trades or business activities that violate Islamic law
(i.e. alcohol, gambling, pornography, tobacco, weapons and armaments, pork and pork products, interest-based financial services like moneylenders)
|No restrictions on trades or business activities|
|Cannot invest based on principles of uncertainty or gambling (hence, instruments like options, and commercial insurance are disallowed)||Can invest in options, futures, and commercial insurance|
|May be viewed as a form of ethical investing based on social and moral values||May include unethical sources of revenue or returns|
|Have to satisfy strict criteria before being labelled as a halal investment||Need only satisfy prevailing financial laws|
Besides the restriction against interest earning (riba), halal investments also have two other defining characteristics, namely:
- Not allowed to invest in businesses or activities that violate Islamic law. This strikes out the obvious ones, such as pornography, gambling, alcohol and pork, but also covers some other sectors such as tobacco and armaments.
- Not allowed to invest based on principles of uncertainty and gambling. This disallows certain types of investments, such as options and futures. Interestingly, certain types of insurance are also not allowed, but Muslims can avail themselves of a takaful to achieve similar benefits.
Because of the stringent nature of Islamic law, halal investments are also good candidates for those who look for ethical investments, since it guarantees zero exposure to sectors or industries that some consider problematic.
(Take note, however, that halal investing doesn’t automatically mean investments that are eco-friendly, green, sustainable or good for the earth; although there’s a good chance for an overlap, there’s a difference between Islamic investing and ethical investing.)
It is not enough simply to abide by these restrictions and guidelines; in order for an investment to be considered halal, it would need to satisfy several financial checks, usually overseen by specially appointed shariah advisers.
So, how would laypersons go about investing in a way that is compliant with Islamic or shariah laws?
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How to find Islamic investments in Singapore?
Use a shariah-compliant robo advisor or investing platform
One of the easiest ways to invest in halal instruments is to join an Islamic robo-advisor or online investing platform.
These platforms are overseen by a regulatory body to ensure only shariah-compliant stocks and businesses are offered to clients.
One such popular platform is Wahed, a global Islamic investing robo-adviser with over 150,000 clients. Through the Wahed app, you can choose an investing portfolio according to your risk appetite, fund your account and watch your money grow.
Refer to a shariah-compliant stock index
Those familiar with investing know that a stock index (such as the Straits Times Index) tracks the performance of an underlying selection of stocks selected to represent a corresponding sector or market.
For example, the Straits Times Index (STI) tracks the top 30 companies trading on the Singapore Stock Exchange.
In a similar fashion, there are indices that track only shariah-compliant stocks and shares, making them a handy reference to look for halal investments that also have a proven history of high performance.
You can also search for indices that track shariah-compliant stocks in other markets around the world.
Once you’ve located the index you want, you can directly invest in the companies listed in them by buying their shares. Alternatively, you can also choose to invest in the indices themselves via an Exchange-Traded Fund (ETF), such as the Wahed FTSE USA Shariah ETF.
Also, you know, just enter ‘shariah + ETF’ or ‘Islamic + ETF’ in Google and see what comes up.
Look for waqf investment projects
Inherent in Islam is the practice of waqf, which refers to a religious endowment (or donation) for the purposes of improving or supporting the community via various projects, such as the construction of a mosque, or a school.
You can invest in such waqf projects, and earn a projected return - you can think of it loosely as crowdfunding for Islamic purposes.
To make sure your investment truly qualifies as a halal one, be sure to invest only through certified platforms. One such platform is the Malaysia-based Ethis.co that has offices in Indonesia and Oman. Closer to home, Warees.sg offer investment opportunities for real estate projects in Singapore.
Alternatively, if you do not wish to limit yourself to real estate projects with a waqf angle, you can also try investing in shariah-compliant REITs, some of which may be found in shariah-compliant stock indices (see previous section).
What returns can you expect from halal investments?
While Islamic investing has its unique features and requirements, it is not so removed from conventional investing such that a notable difference in returns can be observed. Halal investments do not restrict the types of investments you can invest in, only the underlying businesses.
For all intents and purposes, you can expect your returns to be on par with those enjoyed by those investing according to secular principles. There’s no reason to believe that sticking to halal investments will disadvantage any one investor, all things being equal.
Instead, your results will depend on entirely personal factors, such as your risk appetite, the platform you choose, your ability to seek out solid investments and more.
And as with any other form of investing, always remember that investing carries a degree of risk. You should always do your own research, never invest more than you can afford to lose, and always seek professional advice before jumping in.
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