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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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.