You’ve probably heard of values-based investing. Whether your religious beliefs, environmental goals or personal ethics are guiding your investment strategy, the wide array of investments available today allows you to build a portfolio that aligns with your values. Halal investing is just one form of values-based investing designed for people of the Islamic faith. 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, halal investing is based on four Islamic principles.
- 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.
- No high-risk investments. Islamic laws forbid gambling, so investments with a high risk component are not allowed.
- No investing in haram companies. Some industries are simply off-limits to halal investors, including alcohol, pornography, gambling and pork products.
- 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.
What Halal Investing Might Look Like
Given the above rules for halal investing, let’s take a look at what a halal investment portfolio might include. Many stocks, index funds, ETFs, REITs and other traditional investments are allowed, while others are not.
Halal investors can buy stocks as long as they’re not from companies operating in prohibited industries or in a prohibited way. 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.
Funds, including mutual funds, ETFs and index funds are allowed as long as they match up with halal principles. It can be challenging to find funds in which all the components are halal, but there are shariah-compliant funds out there to simplify the selection process.
Real estate is also a good halal investment, as long as you’re not profiting from the interest charged on mortgages. 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.
Besides stocks, funds and real estate, your halal investment portfolio might include sukuks, which are investments specifically intended for Muslim investors. While they’re often called bonds, that can be misleading—sukuks are investments in a business venture that generate profits if the venture is successful. So instead of receiving a guaranteed interest percentage, like a Treasury bond might generate, sukuks will dole out a percentage of the profits from the venture. While sukuks could technically not generate any income and leave you high and dry, the Muslim prohibition against gambling and high-risk investments come into play here and sukuks are usually only offered for ventures with a high likelihood of success.
The 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.
- 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 interview your advisor matches at no cost to decide which one 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.
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