Halal Investing
O Lord! Give us good in this world, and good in the Hereafter.
Halal Investing is Beneficial for both Investors and the Community
Halal Investing is an Islamic approach to investment decision making in which financial products are determined as permissible only after a detailed shari’ah-based review and approval. Because Islamic financial law is centered around the concepts of social justice, ethics, and finance as a means to help build sustainable communities, in its essence, halal investing holds within itself the western concept of ethical and socially responsible investing, too. Thus, halal investing may be a preferred choice among Muslims and non-Muslims alike.
Iman Fund includes common stocks of shari’ah-compliant domestic and foreign companies. We avoid companies whose primary source of income is based on interest or those that engage in alcohol, pork, pornography, gambling, weapons and defense, and other harmful businesses.
Ethical. Protects Investor and Community
Halal investing promotes ongoing detailed vetting and evaluation of any given business that we believe helps mitigate risks for the investor from investing in companies with high risk futures such as going out of business or filing bankruptcy and/or the potential to cause harm to society at large.
Better Performance Amid Global Financial Crises
No investment is free of risk. However, during three recent market downturns, the financial crisis of 2007-2009, and the latter post-crisis phase of 2013-2017, as well as the Covid Pandemic period from May 2018 to April 2021, Islamic finance as measured by the Dow Jones Islamic World Index outperformed conventional markets and proved to be more resilient to global market crashes and crises.
Halal financial screens and market capitalization ratios that AAA employs have the potential to preserve investor’s capital.
See most recent month-end and quarter-end performance of the Dow Jones Islamic World Index and Iman Fund.
Long Term, Value Oriented
Similarly, halal investing tends to be more value oriented. According to some scholars, short-term speculation (frequent buying and selling) with high turnover rates is considered a type of gambling and is discouraged. Due to frequent trading and broker commissions, they also incur more fund expenses to the investor compared to low turnover ratios, which are more costly as well as tax efficient on capital gains.
It is possible that low turnover ratios and multiple screens yield less options to invest in, which may limit diversification of the fund portfolio and making it prone to more vulnerability.
Permissibility is Grounded in These Core Principles
- Broadly defined, halal includes any food, product, service, business, financial activity or resources, etc. that is permissible under Islamic law.
- Interest (Riba -Arabic) is strictly prohibitied (haram) because it gives way to financial injustice by putting the lender in a superior and more secure financial position than the borrower. The Holy Quran emphasizes this principle in multiple verses such as Chaper 2:275-281 and Chapter 3:130.
- Sharing of risk: investors must share in both profit and loss.
- Upholding of ethical and moral principles at all times to create a sustainable economy.
- A business that violates the core tenets of Islam – manufacturing, selling and marketing of haram business categories or activities – must be avoided. See the list below.
Alcohol
Pork and pork-based products
Tobacco
Gambling and some gaming
Adult entertainment (pornography)
Weapons of destruction and the reason for their use
Banking and insurance industry due to interest income
Halal Screen
Companies pursuing these businesses are screened out first.
Business Sector Screen/Sources of Income
In addition to halal screening, AAA carefully evaluates all companies according to these criteria, which are further explained below.
Financial Ratios Screen
Financial Ratio Guidelines
The 5% Rule
Ongoing Monitoring & Reevaluation
Financial Ratios Screen
- Businesses with weak financial standing (negative cash flow, considerable debt) with a potential to cause higher risk to the investor.
- If any company doesn’t pass through the above screens, it is considered “haram” (impermissible) and is eliminated from the potential pool of investment options.
- There may be slight differences in the interpretations of Islamic financial law, therefore certain guidelines may vary slightly, but they all refer back to the same core principles.
Financial Ratio Guidelines
Iman Fund’s halal screen follows stricter financial ratio guidelines compared to other halal funds. We eliminate companies with:
Income from haram sources equal to or less than 5% (See the 5% Rule below)
More than 30% total debt compared to market capitalization (trailing 12-month average)
Cash and interest-bearing securities greater than 30% compared to market capitalization
Accounts receivables more than 45% compared to total assets (trailing 12-month average)
The 5% Rule
In order to address the modern economic, trade, and business environment globally, Islamic scholars have established a 5% Rule, along with the purification of wealth among other financial guidelines, to determine when the presence of a certain haram business activity is not considered a “core source of income” thus making the core business halal.
For example, the “5% Rule” suggests that a core business activity must account for more than 5% of a company’s revenue. This reasoning may apply to companies selling, for example, alcohol, pork, or earning some interest-based income. So, if a company’s income from such sources exceeds 5% of its core business income, then investing in the company is considered haram (forbidden).
Let's Look at Examples of the 5% Rule Application
- A grocery store chain might sell pork and alcohol in addition to a large number of other halal groceries.
- A computer software company may write programs used in gambling or pornography.
- A publishing company might own a network/website exclusively for pornography.
- An eCommerce company might offer credit cards and earn interest income from them.
Only a deeper examination of such companies will reveal the amount of income coming from haram sources. AAA will determine to either apply the 5% Rule or fully eliminate them.
This is why Islamic scholars agree on purification of questionable investment income. This means that any potential investment income derived from Riba or other haram sources must be given to charity. It should be done anonymously without obtaining any donation-related benefits, such as a tax deduction, recognition, or a product or service in return.
Ongoing Monitoring & Reevaluation
If a company qualifies to be halal for investment once, that doesn’t mean it will remain halal forever. Therefore, most halal investment companies continuously monitor their portfolios to ensure the selected securities maintain shari’ah compliance. Allied Asset Advisors Board of Directors and our shari’ah advisers conduct quarterly reevaluation of its portfolios to maintain compliance.
What Investment options are considered halal?
Here’s a table summarizing what asset classes are haram or halal.
