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Halal investment follows guidelines in the Qur’an, prohibiting interest and investment in haram industries. Halal investments include profit sharing and real estate investment trusts, while life insurance is debated. Sharia-compliant investment companies have emerged successfully.
A halal investment is an investment that follows all the guidelines defined in the Qur’an, the Islamic holy text. There are two main aspects of a halal investment. The first is that the investment should not generate interest. The company or industry one is investing in must also be halal in its actions, restricting investment in some companies, such as those that produce or sell alcohol. Beyond these guidelines, Muslims are free to invest in any way they wish.
The initial part of what makes an investment halal is that you cannot earn interest on the money. This restriction is carefully detailed in the Qur’an. Earning income by inaction is not allowed. Following this rule, profit sharing is allowed, because it is the result of hard work; interest earned on a savings account is not.
The restriction of interests has led to a series of financial instruments that allow a halal investment. One is a real estate investment trust (REIT). This is a way for a group of investors to put their money into a commercial property with the intention of developing it for halal business only. Investors invest money in developing the property, which is a halal investment, and then withdraw their money from the trust and sell the land. The profit is made from the rent paid by the halal companies.
Another halal investment is life insurance. There is some debate as to whether it is actually halal, but certain types are generally accepted as permissible. One reason is because insurance through an employer can be considered a subsidy. Another reason is because there is no certainty that the insurance policy will ever be paid, so it is not really a contract and therefore allowed.
The second part of what constitutes a halal investment is that money cannot be made in any way from prohibited or haram businesses. This means that the property cannot be rented to a haram business and that other types of investments, even if indirect, cannot profit from a prohibited industry. A haram business is one that violates Islamic sharia law, such as producing alcohol, handling haram animals, or gambling. This rule applies to income earned from a REIT and investments that could underpin a life insurance policy.
Several investment companies that strictly follow sharia law have emerged successfully and actively work with special financial considerations from the larger non-sharia banks. These institutions have successfully integrated halal investment strategies while continuing to turn a profit. They are responsible for developing and selling various REIT properties around the world.
Smart Asset.
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