Halal vs. Haram Investment Choices

Muslims should strive to have earnings that are pure. This means that the money one earns comes from halal sources, without gambling, and without cheating or scamming anyone. Money can’t be earned by working for, or running, a company that provides a forbidden product or service. This would include, for example, alcohol, pornography, and pork, among other things. Additionally, interest, or usury, is prohibited in Islam, so earnings can’t come from giving out loans or interest-based investments.

As far as investing, let’s first look at some examples of what is not considered halal. Bank products are typically not allowed. For example, savings accounts, money market accounts, and certificates of deposit are all interest-based. In short, each of these investment options involves the individual giving money to the bank which the bank turns around and loans out to others. The bank earns its own interest, and gives a small cut of the profits to the individual.

Bonds are not allowed either. This includes both Treasury bonds and corporate bonds. Bonds are basically loans that the investor makes to the government or to a company, and that entity makes an interest, or coupon, payment to the investor.

So what is allowed? Trading stocks is permissible, but you do have to be careful. It’s not allowed to buy stocks for companies that produce products or services forbidden in Islam. Plus, you have to review the company’s leverage, or how much debt it has, as well as the company’s level of liquidity, or how much cash and cash equivalents it holds.

Real estate is also allowed. This can be either as a house that is purchased, fixed up, and sold at a profit; or, a home that is purchased and rented out to others for an income stream.

Sukuk, or Islamic bonds, are another option. I have a separate post that explains what sukuk are.

Additional options include venture capital, or investing in other companies, jewelry and precious metals, as well as fine art and collectibles. If & when those things go up in value, the investor can sell.

A couple of investment choices that I consider gray areas are commodities and foreign exchange. The problem with commodities is that they’re a speculative investment and might take advantage of others’ economic hardships. Also, commodities investing is often done via futures contracts, which I consider to be like gambling. As for foreign currency (or FOREX) trading, it’s not forbidden, but it’s typically done via leverage, or money that’s loaned to the investor by the broker.

This was a very brief overview of investment choices, but to find out more detail, check out my book: Open the Door to a Wealthier Life. It’s available on Amazon in paperback and Kindle format. Thanks for reading.

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Islamic Home Financing: How Does it Work?

Have you ever wondered how Islamic home financing options like University Islamic Financial and Guidance Residential work, and how they are different from conventional interest-based mortgages?

First, let’s review how conventional mortgages work. The home buyer takes out a loan with a bank, for instance, and a fixed or adjustable interest rate is applied based on various factors. The monthly mortgage payment is made up of principal, which is the actual cost of the home, and interest. Earlier in the life of the mortgage, interest makes up a greater proportion of the mortgage payment. As the loan progresses, a greater proportion of the loan is principal.

Now let’s look at Islamic home financing.

With University Islamic Financial, or UIF, they buy the home on the individual’s behalf by paying 100% of the purchase price. Then UIF marks up the price and sells it back to the individual who actually wants the home. UIF basically provides an interest-free loan to the homebuyer. It factors in its profit up front and calculates equal monthly payments for the individual to make.

Guidance Residential has a different model called the Declining Balance Co-ownership Program. It’s easier to explain with an example. Suppose someone wants to buy a home that costs $100,000, but only has $20,000 saved up. Basically what happens is that the home buyer enters into a partnership with Guidance. The individual puts down $20K, and Guidance covers the rest. The home is now co-owned by the individual and Guidance, with the individual owning a 20% share of the property and Guidance owning 80%.

Next, the individual begins to pay down the $80K balance that Guidance currently owns. The payments may go through a bank, but the bank simply acts as a bill collector and forwards the payments to Guidance. Over time, the home buyer’s share of the property increases, while Guidance’s share decreases.

For helping the individual purchase the home, Guidance does charge what it calls profit, for use of the property. You can think of this as rent. Guidance owns a chunk of the property, but is allowing the actual homebuyer full use of it.

I hope this helps clarify how Islamic home financing works. To learn more about purchasing a home for personal use or as an investment, along with many other topics related to building wealth in a halal way, check out my book, Open the Door to a Wealthier Life. It’s available on Amazon in paperback and Kindle format. Thanks for reading.

Conventional Bonds vs. Islamic Bonds (Sukuk)

Conventional bonds include corporate bonds sold by corporations and Treasury bonds sold by the government. These are considered debt investments.

Basically, the investor is making a loan to a corporation or the government. The investor will receive a principal payment after the bond matures, or expires, but will also receive regular interest payments during the life of the bond. Because of these interest payments, or coupon payments, conventional bonds are not considered halal, or permissible, investments according to Islam.

There is another option for Muslims, though, called sukuk. Sukuk are sometimes called Islamic bonds. Sukuk are typically sold by foreign governments or companies. As with conventional bonds, these governments and companies sell sukuk to raise capital, promising to pay back the principal amount, but they also pay out small distributions during the life of the sukuk. These aren’t fixed or guaranteed amounts, so technically it’s not an interest payment.

Sukuk are completely asset-backed, and those assets are being used to generate the income that allows for the distribution payments. Additionally, there is shared risk between the entity selling the sukuk and the investor.

Sukuk are considered a capital preservation investment. Sukuk provide a great way to diversify one’s portfolio so you have money invested in something other than the stock market. They won’t have high returns, but are relatively safe and definitely a better option than letting your money sit in the bank and lose value because of inflation. If you are setting aside money for a down payment on something or a college education, sukuk might be the right choice for you.

To learn more about sukuk and how to invest in them, check out my book, Open the Door to a Wealthier Life, available on Amazon in paperback and Kindle format. Thanks for reading.

Open the Door to a Wealthier Life

As-salaam-alaikum and welcome to my blog.

As Muslims, we have restrictions on how we can earn and invest money. It may seem like we are limited in our options, but in reality, the purpose of prohibitions is to keep us from harm. Plus, it actually simplifies things.

If you are looking for halal ways to make money and halal investing opportunities, you’ve come to the right place. I recently completed my book, Open the Door to a Wealthier Life. I not only explain how to get started in investing based on Islamic and ethical principles, but so much more.

What you will learn:

  • How to enhance your skill-set
  • How to maximize your income
  • How to minimize your expenses
  • What investment choices are available
  • Why to even bother investing your money
  • The difference between various investments
  • Which investments are considered halal and which are not
  • How to get started in investing on your own with minimal cash
  • How to finance a home without paying interest
  • How to prepare for retirement

A wealth of information awaits. Are you ready to open the door?

My book is available on Amazon in paperback or Kindle format.

Click here to purchase the paperback version.

Click here to purchase the Kindle version.