As Muslims, we’re not permitted to engage in riba, or interest. This means that certain types of investments are not allowed, such as interest-bearing savings accounts, certificates of deposit, and bonds.
“…Allah has permitted trading and forbidden interest…Allah has made interest fruitless and charity fruitful…”The Holy Quran [2:275-276]
Most scholars also agree that speculative investments (especially if trading on margin) and derivatives like futures and options contracts are impermissible, though there’s still debate around specific issues.1
What does that leave us with in terms of permissible investments? Well, plenty. Generally speaking, we can invest in stocks, mutual funds, exchange-traded funds (ETFs), venture capital, real estate, and precious metals. The important thing is to avoid haram (impermissible) businesses and any semblance of riba.
In this article, let’s look at stocks, mutual funds, and ETFs.
Stocks are essentially tiny shares of ownership in publicly traded corporations. There are various online brokerage services you can use to purchase stocks. In the past, it was common to incur a brokerage fee when buying or selling, but that practice has largely become obsolete.
The kicker with stocks is that you can’t invest in just any company. The core business has to be permissible, so no companies that produce alcohol, porn, gambling, etc. According to various scholars and institutions like AAOIFI, there are some other factors to consider such as the amount of interest-bearing debt a company holds.2
If you need help screening stocks for Shariah compliance, you’re in the right place. Check out the Halal Reports on this very site.
Mutual funds are collections of stocks put together by investment companies. Funds pool resources from many investors and contain stocks for many different companies in many different industries, providing instant diversification and thereby reducing risk.
Funds can have themes or styles, such as growth funds that invest primarily in younger, fast-growing companies or income funds that invest in well-established, dividend-paying companies. To invest in a mutual fund, one typically has to fill out an application directly with the investment firm and set up a money transfer.
Amana Funds have been around for quite some time. They have the Income Fund with a focus on steady growth and dividend income, the Growth Fund with a focus on growing companies and long-term value, and the Developing World Fund that invests in companies in emerging markets outside of the US.
Iman has only one fund, its namesake. This one is designed for capital growth, not dividend income or capital preservation.
Azzad has a couple of funds to choose from. One is the Ethical Fund, which invests in growing companies with a goal of building long-term value. The Wise Capital Fund aims for both dividend income and capital preservation.
ETFs are very similar to mutual funds in that they’re a collection of stocks for various companies, but ETFs are more convenient because you can buy or sell them just as easily as stocks using your existing brokerage account. Since they trade throughout the day like individual stocks, prices fluctuate correspondingly.
Under ShariaPortfolio’s SP Funds brand, they have a few ETF offerings, one of which is the SP Funds S&P 500 Sharia Industry Exclusions ETF. This one aims to invest in growing companies and trades under SPUS.
If you’d like to add some automation to your life, consider using a robo-advisor like ShariaPortfolio Express. The way this works is that you sign up, transfer funds, and fill out a questionnaire. That survey determines your comfort with risk and other factors, then creates an ideal portfolio for you, which automatically allocates a percentage of your money into funds, sukuk, gold, and/or cash. ShariaPortfolio has a $1,000 USD minimum to open an Express account.
Wealth Management Services
If you really want to be hands-off and would prefer someone else manage your money, you can look into ShariaPortfolio’s Access service or Azzad’s Ethical Wrap program. These are wealth management services designed for high net worth folks. This entails consulting with an advisor, forking over your money, and letting them invest it according to your goals, timeline, and comfort with risk.
This is by no means an exhaustive list, but hopefully gives you a primer on halal (permissible) investing options available for Muslims.
Disclosure: I have money invested in all of the mutual funds and ETFs mentioned above.