What Is Shariah Investing?
We are hearing more and more frequently about Shariah investing, as it is becoming increasingly prominent. However, very few of us actually know what Shariah investing is, how it works, and who can invest.
Shariah investing is an important financial foundation that millions of Muslims follow all over the world. Essentially, it’s faith-based guidance that helps followers of Islam to make financial decisions that are ethical within their religion.
However, the principles of Shariah can be of interest to anyone – so let’s dig a little bit into what it all involves.
Shariah Investing – The Basics
To understand how Shariah investing works, it is first of all important to understand what Shariah is.
Shariah means ‘clear path’, the ‘correct path’ or even the ‘way to the original source’. It is a set of Islamic rules and laws that people of the Islamic faith follow as tradition. Shariah can be implemented in all areas of their lives, including their financial matters.
It’s a common misconception that Shariah rules only impact social and dietary matters. In fact, Muslim investors are some of the most careful – and it’s all down to what Shariah dictates they can and can’t put money behind.
How Does Shariah Investing Work?
While it may sound as though Shariah limits investment opportunities, that could not be farther from the truth! In fact, Shariah investing simply requests that investment choices must be ethical and socially responsible – it’s a very noble way of building a portfolio.
Shariah investing intends to better the community around you, wider society, and its development, as opposed to simply investing for your own well-being and fortune. Consider it a less selfish way to grow money in stocks and shares.
Ethical investing has grown massively in recent years, with many people choosing socially responsible companies to put money behind. Many investors, too, do so because they wish to change the world for the better, not to make revenue. Much of this can tie back to the financial principles of Shariah.
What Are the Rules of Shariah Investing?
There are three simple rules in Shariah to help one invest properly, so, if you’re a beginner it might be worth making a note of these.
The first principle, or rule, is the prohibition of interest. That is to say, that in line with said investments, you should neither pay nor receive interest.
Interest under Shariah is considered to be unfair and unjust. In fact, banks that work under Shariah are not permitted to create interest-based loans. That goes for house loans, car loans, and other credit that is short-term and long-term.
Instead, they make their money by buying properties and renting them to their clients. However, you will not pay interest on such assets. That also means that for your own investments, you can say goodbye to interest, too!
The second prohibition under Shariah finance is that of investing in certain specific businesses. You are not permitted to invest in businesses that are considered to be immoral. That includes any business with a link to alcohol, pork products, illicit drugs, weapons, gambling, and so on. This ties in with the Islamic concept of ‘haram’, which refers to products and consumables considered immoral or illicit – and are therefore banned.
In fact, in reference to the first prohibition, you are not permitted to invest in businesses or companies that earn the majority of their wealth from others (in the form of interest, for example). Therefore, it’s always important to check where your chosen stock is actually coming from. This can make Shariah investing a little tricky for beginners!
Finally, the last principle of Shariah investing is the balanced distribution of wealth. That is to say that a certain percentage of your income, or general wealth, must be given to charity. You must help those who are less fortunate than you. Not only does it benefit the community and society around you, but it is also believed that it will purify the rest of your wealth.
Ultimately, these three principles help to ensure investors are benefiting the wider cause, not themselves – and that they are never doing so at the expense of products or services deemed haram within Islamic guidelines.
How Do You Invest Under Shariah?
Investing by following the principles of Shariah can be a little tricky, especially at first. Finding the right investment opportunities to suit you and the Shariah principles requires extreme dedication, knowledge, and effort. But how do you go about doing that?
The best way to ensure that your money goes into and follows the Shariah principles is by working with investment professionals you can trust. Thankfully, there are a few specialists on Shariah investments within the UK (HSBC being one of them) – it simply takes looking them up and meeting with them.
It is worth ensuring that they know and understand the principles of Shariah themselves to ensure that they will do what is expected of your money. Many people seek out halal investment companies and Shariah-approved brokers to help them make portfolio decisions that are permissible in the eyes of Islam.
A Conclusion on Shariah Investing
Finding the right investments, companies, and so on while being moral and fair may sound like a bit of an oxymoron, but it doesn’t have to be. Essentially, following the principles of Shariah simply means being moral and careful with your money.
As was mentioned above, you are also expected to be charitable and fair in any returns you make. It’s a noble system that works wonders for millions of people – instead of focusing on greed and sheer building of wealth, Shariah investing lets traders and investors give something back to the world. It’s also a great way to relieve oneself of some of the guilt that can arise from trading – while we are all entitled to make a living, if you want to make your money benefit people further, Shariah’s rules are good ones to follow.
So, take the time you need if it’s your first time exploring Shariah investing, and ask for help when you are not sure. You may not get it perfectly right the first time, but following the three principles and bearing them in mind will help to guide you through more mindful investments.