There are many motivations behind how and why you make the investment choices you do. Some people believe in investing in social causes, while others may opt for agriculture or real estate. All of these investments may help curate a strong portfolio.
Of course there’s also age and asset allocation to think about, but what about aligning your religious beliefs as well? If you’re familiar with the Islamic faith, halal investing may be of interest to you. It allows you to build an investment portfolio that is in alignment with your religious beliefs.
Let’s take a closer look at halal investing to see if it’s the right fit for your situation.
What Is Halal Investing?
You may associate the word halal with food, but essentially, halal describes a situation that is permitted by religious law. This principle can be extended into other areas of life, including investing. So, halal investing is an option for Islamic investors that meets the requirements set by the faith.
Although halal investing is a relatively complex topic debated by American Muslim investors, the basic principles are rather straightforward. It’s very similar to other forms of socially conscious investing. For example, if you’re being socially aware of investing, you may avoid investing in companies that earn revenue from alcohol, gambling, and other activities that are out of alignment with the faith.
Beyond that, this style of investing chooses to work with companies that don’t have a significant amount of income through interest on loans. If you’re a Muslim investor, halal investing ensures that your investment portfolio aligns with your faith.
4 Tenets Of Halal Investing
When building a halal investment portfolio, there are several general tenets to follow.
It’s important to note that there is some debate within the community about what is halal versus what isn’t halal. However, the basic tenets we explore below seem generally agreed upon.
1. Avoid Interest
According to Islamic law, paying or charging interest is not allowed. The reasoning behind this is that interest payments are often associated with debts or loans that could be considered exploitative.
With that, halal investors steer clear of any interest earned through the profits of a loan. For example, you couldn’t invest in mortgages due to the interest collected on the debt.
There are some workarounds that are debated, such as how Islamic banks treat and pay interest as a fixed amount more akin to a contract. As such, your personal avoidance of banking and similar industries to invest in should be considered around your belief in what is halal for interest.
2. Stays Clear of Certain Industries
You can invest in a wide range of industries. But not all industries are considered appropriate to invest in.
If you want to stick with a halal portfolio, you’ll need to avoid stocks in certain industries.
These include companies that earn revenue through:
- Pork products
- Traditional financial stocks that could have underlying loans built-in
In many ways, halal investing mirrors socially responsible investment portfolios.
3. Shuns Excessive Risk
Islamic law discourages taking on too much risk. As an investor, this would translate into a low-risk portfolio.
If you are counting on luck in any way with your investments, that’s not a good fit for a halal portfolio. That’s because luck is equivalent to gambling, which is prohibited for Muslims.
4. Prioritizes Charity
When building out a halal investment portfolio, you can’t funnel all extra funds directly into wealth building. Instead, you’ll also need to prioritize giving back to your community.
The exact amount you give to charity is up to you. But setting aside a certain amount is an important part of a halal investment strategy.
Building Wealth With Halal Investing
When building a halal investment portfolio, your religious beliefs is one piece of the puzzle. Beyond your religious investment constraints, you should consider your personal finance goals.
One of those financial goals might be to fund a haji, or once-in-a-lifetime journey. Another common financial goal is to reach a comfortable retirement at some point. Whatever your financial goals are, halal investing can help you reach those long-term goals.
If you want help mapping out a halal investment portfolio, then hiring a financial advisor that specializes in this investment style could be the right move. If you don’t want to go the traditional financial advisor route, consider Wealthsimple (only available in Canada). This robo-advisor offers a halal investment portfolio.
Finally, you can choose to build out a halal investment portfolio on your own. If you want to build your own portfolio, check out our complete guide. Simply filter your investment choices to only include assets that are aligned with your faith.
Assets To Consider
Halal investing covers a wide range of assets. Whether or not a particular asset is permissible varies based on individual interpretations. But the assets below are a good place to start building out your portfolio:
Stocks: Stocks in appropriate industries can be halal friendly
Funds: Some funds are specifically set up for socially responsible investors. Some of these funds may be aligned with your definition of halal.
Sukuk: This is an Islamic financial certificate that shares similarities with both bonds and loans. The interest is not guaranteed, so it’s a halal option.
Precious metals: Gold, silver, and other metals that hold value are generally considered halal.
Real estate: Real estate can be halal approved if you avoid properties with mortgages.
Cryptocurrency: Although investors have differing opinions on this, some consider cryptocurrency in line with halal investing. If you aren’t sure, consult with a financial advisor.
The Bottom Line
Building out a future that is in line with your financial goals doesn’t have to be so “by the books.” You can create a portfolio that is in line with your values and beliefs, and if halal investing makes sense for you, you may find investing a lot more pleasurable and interesting as you continue to increase your net worth.
Sarah Sharkey is a personal finance writer covering credit cards, mortgages and student loans. She has written for numerous finance publications, including MagnifyMoney, Business Insider and ChooseFI. Her blog, Adventurous Adulting, helps young adults get a handle on their finances.
Editor: Claire Tak