Islamic principles therefore prohibit investment in conventional bonds and other debt securities that generate interest income. Sukuk investments are halal because they seek to generate profits from the investment income of their underlying assets, rather than from interest and principal payments. The Islamic ban on interest has led many Muslims to turn to equity investment in the United States. Unfortunately, however, many of these do-it-yourself approaches are too simplistic and ignore the carefully defined rules for halal investment explained by our scholars.
Halal investment is about investing in companies that conform to Islamic investment principles. Many conventional investment products are not compliant. For example, it is forbidden to profit from debt, so bonds and GICs are off the table for observant Muslims. In addition, halal investment prohibits businesses that profit from certain activities, such as alcohol, tobacco, gambling, pork and weapons, among others.
Islamic investments are a unique form of socially responsible investment because Islam makes no division between the spiritual and the secular. This means that much greater scrutiny is applied to investment practices because religion is taken into account in all financial decisions. Investments that wish to conform to Islamic investment policy must follow a specific set of guidelines. Cash held in savings accounts, stock trading accounts and 401(k)s is often paid out with interest and is therefore not Shariah-compliant PROBLEM OF PORTFOLIO DIVERSIFICATIONEven for Muslims who already adhere to Shariah-compliant investing, proper portfolio diversification is difficult.
All the money earned on a stock comes from the company's business, so Muslim investors often want to know how the company operates and how it earns its money. A lot of time must be spent examining each company's stock for Shariah compliance and continually monitoring to ensure that the company remains compliant. Many American Muslims think of 401(k) plans as investments, but they are not: they are tax-advantaged accounts that contain investments. Managing assets according to Islamic precepts is a bit more complicated because there is a unique specification to avoid interest-bearing investments of any kind.
Investments in equities and exchange-traded funds ("ETFs") can lose value, meaning that you may get back less than you invested. Muslim investors should also consider whether the investment itself is halal or not. They are advised to avoid investing in industries that promote alcohol, tobacco, pornography, etc. Their capital is at risk and investments are not covered by the Financial Services Compensation Scheme (FSCS).
Note that just because a company has a halal business line does not mean it is halal to invest in it. More cautious halal investors will avoid companies with any kind of interest-bearing debt, although these opportunities are harder to find. Establishing an Islamic investment policy, whether for the institutional or individual investor, starts with the Shariah Board, a group of Islamic scholars (jurists) who check that investment products comply with Islamic law and carry out due diligence on them.