What Is Halal Investing?

Halal investing refers to a financial approach that aligns with Islamic principles, ensuring investments comply with Islamic law. This typically involves avoiding industries like alcohol, gambling, and interest-based financial services, while focusing on ethical investments in permissible sectors. Halal investing also emphasizes profit-sharing arrangements and investments in companies with minimal debt. Let’s take a look at what halal investing means and what it might look like.

If you’d like help designing an investment portfolio that meets your needs, consider working with a financial advisor.

What Does ‘Halal’ Mean?

According to the American Halal Foundation, “halal” is an Arabic word meaning “lawful” or “permitted.” Muslims use this word to designate products and practices that are allowed in the Islamic religion. You might already have heard this word used to describe certain kinds of foods or a diet but it extends to a wide variety of things in life, including investing.

It’s also helpful to know what “haram”– the Arabic word for “unlawful” or “not allowed”– means in the context of investing. Some types of financial dealings or investments are off-limits or unlawful to Muslims because they’re explicitly forbidden by the Islamic religious texts.

Halal and haram are guiding principles for Muslims that cover everything from what you may eat and drink to how much risk you may take on when investing. 

Halal Investing Basics

According to the American Halal Foundation, there are no official rules that govern or dictate halal investing. However, halal investing operates on the principles of Shariah law, which governs ethical and permissible financial practices. Here’s a look at the primary principles of halal investing:

No Profiting from Interest on Debt or Loans

Debt and paying or charging interest are both generally unlawful for Muslims, so many forms of debt and loans – or profit from debt or loans – are off-limits. The Accounting and Auditing Organization for Islamic Financial Institutions has a standard that allows a minimal amount of interest income from investments, including the stipulation that income from prohibited sources (such as interest) shouldn’t exceed 5% of the total income. Additionally, companies that have a significant amount of debt are usually not allowed for halal investors.

Asset-Backed Investments

Halal investments must be tied to tangible, productive assets. This excludes speculative practices such as derivatives or short selling, which are viewed as creating unearned profits. Instead, halal investing focuses on real economic value, such as investing in physical assets like real estate or businesses.

Risk and Reward Sharing

Shariah law emphasizes fairness and mutual benefit, which is reflected in the principle of risk and reward sharing. Financial instruments like mudarabah (profit-sharing) and musharakah (partnership) are preferred, as they align the interests of all parties involved and promote collaboration.

Investing in Haram Is Forbidden

Halal investing requires avoiding industries or practices that are considered haram (forbidden). This includes sectors such as gambling, alcohol, tobacco, pork production, and conventional banking. Investments are screened to ensure they align with Shariah values and promote ethical business practices.

Donate Profits from Haram Investments to Charity

Remember the 5% rule mentioned above? While the commonly used standard says that 5% or less of investment income can come from haram sources, halal investors are often encouraged to take any money that comes from haram investments and donate it to charity.

So for many Muslims, halal investing means taking part in secure, low-risk investments that don’t fund or benefit from unlawful industries or products, then donating the small portion of your investment income that does end up coming from unlawful sources to charity.

Halal Investing Options

By exploring these halal investment options, individuals can build diversified portfolios that align with their faith and ethical standards.

1. Compliant Stocks

Investing in stocks of companies that adhere to Shariah principles is a common halal investment option. These companies must avoid involvement in forbidden industries such as alcohol, gambling, and conventional finance. Additionally, they should maintain low levels of debt and interest-based income. Many financial platforms provide Shariah-compliant stock screening tools to help investors identify eligible companies.

For example, buying stock in a liquor company such as Pernod Ricard would not be allowed, as alcohol is not permitted for Muslims. Buying shares in a company with significant debt would be considered risky, so also not permitted. However, stocks from a financially stable company selling a halal-compliant service or product would be allowed.

2. Real Estate

Real estate is a popular halal investment, provided the property is used for permissible purposes and you’re not profiting from the interest charged on mortgages. Rental income from residential or commercial properties aligns with halal principles as it stems from tangible assets rather than speculative gains. Profiting from rent, on the other hand, is fine, so REITs can be a good choice for halal investors. Halal investors also often put their money in gold and other precious metals.

3. Islamic Mutual Funds

Islamic mutual funds pool money from investors to buy Shariah-compliant assets, such as approved stocks or sukuk (Islamic bonds). These funds are managed by professionals and follow strict guidelines to ensure all holdings align with Islamic law, making them a convenient option for halal investors.

4. Sukuk (Islamic Bonds)

Sukuk are asset-backed financial instruments that generate returns without involving interest. Unlike traditional bonds, sukuk represent ownership in tangible assets, such as real estate or infrastructure projects, and provide returns through profit-sharing rather than interest payments.

5. Halal ETFs

Exchange-traded funds (ETFs) designed to meet Shariah compliance are another option. These funds invest in diversified portfolios of halal assets, such as compliant stocks or sukuk, providing easy access to broad market exposure within Islamic guidelines.

6. Profit-Sharing Partnerships

Investments structured as profit-sharing agreements or joint ventures align with Islamic principles of shared risk and reward. These arrangements involve partnering in business ventures where profits are distributed based on pre-agreed terms.

Frequently Asked Questions (FAQs)

What Is Halal Investing?

Halal investing is an approach to financial management that complies with Islamic principles. It avoids prohibited activities, such as earning or paying interest (riba) and investing in industries like alcohol, gambling or conventional banking. Halal investments focus on ethical practices, tangible assets and risk-sharing structures.

Is Investing in Stocks Haram?

Investing in stocks is not inherently haram, but it depends on the company and its practices. Stocks are considered halal if the company operates in a permissible industry and meets criteria of Islamic law, such as low debt levels and minimal income from prohibited sources like interest.

How Can I Ensure My Investments Are Halal?

To ensure investments are halal, use Shariah-compliant funds, screening tools, or consult an Islamic finance advisor. Verify that the investments avoid haram industries, minimize interest-related activities, and involve ethical, asset-backed practices.

Can I Earn Dividends Through Halal Investing?

Yes, dividends are permissible in halal investing if they come from companies that are compliant with Islamic law. These dividends represent a share of profits, which aligns with Islamic principles of ethical wealth sharing.

Bottom Line

Like many forms of values-based investing, halal investing allows Muslim investors to support companies that align with their beliefs. Even when avoiding haram companies, risky investments and profiting from interest on debts, halal investors can build a diversified portfolio that works for them and fits their value system.

Investing Tips

• If you’re wondering what type of investing strategy is right for you or if you simply need help implementing it, you may find it helpful to talk to a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Not sure what the right mix of investments is for your portfolio? This asset allocation calculator can help you make the right choices for your portfolio based on your risk tolerance.