Is Investing Money Halal or Haram?
For Muslims, the question of whether or not to invest is a complicated one. On the one hand, investment is seen as a way to grow wealth and provide for oneself and one's family. On the other hand, some investments may go against Islamic law principles. But as the Muslim population proliferates, this question of Muslim investing has grown weightier than ever.
Plus, with so many investment forms tilting towards the non-tangible, Muslims are in a serious quagmire. Stock portfolios, cryptocurrency, and even real estate can be considered intangible assets. So, is there a way to invest without breaking sharia law principles?
In today's blog post, we'll explore different ways Muslims can invest without breaking Sharia law. We'll look at both halal and haram investments, and discuss why it's important to stay within Islamic boundaries when investing and how to do so. Let's get straight into it.
Main Rules of Islamic Investing
In general, the following investment rules are important for Muslim traders to know:
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Muslim traders cannot invest in companies that make a substantial amount of money from gambling, alcohol sales, pornography, tobacco sales, insurance, weapons manufacturing, or pork production.
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Avoid any interest-bearing investments. Basically, any business whose activities violate the core protected tenets of Islam are considered haram.
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Muslim traders must share in profit and loss, and receive no interest.
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Any potential company that is to be invested in must be evaluated ahead of time to identify if its business activities and financial statements are halal.
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Bonds and interest-based investments are not permitted.
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Investing in the stock of businesses with very high debt (also known as “high leverage”) is not permitted.
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Businesses who have over 5% of their revenue from haram sources cannot be invested in by Muslim investors. This is also known as the 5% rule, and provides a little bit of leverage for Muslim investors to avoid haram actions.
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Businesses that have over 33% total debt compared with their overall market capitalization in a year-long average are haram.
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Businesses that have over 45% accounts receivable compared to their total business assets in a year-long average are haram.
It’s worth noting that the interpretation of Islamic law in the context of business activities requires a lot of nuance, so halal investments can really vary a lot. Different standards also exist. It’s also not always possible to avoid haram business activities.
Islamic Authorities' Opinion
When it comes to whether or not investing is halal or haram, there's no clear-cut answer, even for Islamic authorities. That's because there's still a great deal of debate surrounding the topic. Exploring Islam authorities' opinions on investing should help us reach a valid conclusion.
The Shariah board is the Islamic equivalent of a board of directors. It is a group of Islamic scholars and professionals responsible for giving religious rulings on Islamic business practices. This group determines whether or not a certain business or business practice is halal, haram, or mubah. They arrive at a conclusion after a careful examination of the Quran and Hadith. They also intricately the guiding principles, tenets, and basics of the practice of Sharia law.
In recent years, the Shariah board has been debating the topic of whether or not investing is halal. While there's no clear ruling as of yet, certain members of the board are in favor of investment while others are against it. The main reason for this debate is a lack of clarity when it comes to defining "investing."
For some, investing is seen as a way to grow one's wealth. But for others, investing is seen as gambling. And since gambling is haram, they believe that investment is also haram. This is where the debate lies. Is investing a form of gambling? Or is it a way to
According to a 2013 ruling by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Islamic investing is permissible as long as the investor does not violate shariah principles. The ruling goes on to state that investment is halal if it meets certain criteria.
These criteria are as follows:
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There's no element of chance or speculation.
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The investment is made with the intention of making a profit.
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The investor is not involved in any prohibited activities.
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The investment does not fund any haram activities.
Based on these criteria, it's clear that some forms of investment are halal while others are haram. For example, investing in a company that is engaged in interest-based activities is not permissible. This is because one of the criteria for halal investment is that it cannot fund any haram activities.
Halal Investment Ideas
Now that we've explored what Islamic authorities have to say about investing, let's take a look at some halal investment ideas. As stated earlier, one of the criteria for halal investment is that it must be made with the intention of making a profit. Therefore, any investments made with the sole purpose of helping others aren't halal.
That said, here are a couple of halal investment ideas Islamic people could look into:
The Stock Market
The stock market is a halal investment idea as long as the investor or broker isn't violating any shariah principles. For example, an investor cannot invest in a company that's engaged in interest-based activities or prohibited businesses. However, investing in stocks is halal because the investor is buying a part of the company and is entitled to a share of the profits.
Is Investing in Stocks Haram or Halal?ETF Index Funds
ETF index funds are also a halal investment idea. That's because these types of funds invest in a basket of stocks that represent a particular index, such as the S&P 500. And since the stocks in the fund are diversified, the risk is spread out, which is in line with shariah principles.
Forex Trading
Forex trading can be either haram or halal. However, Muslims looking to trade forex can try out Islam forex trading. This is a type of forex trading that is conducted in accordance with shariah principles. For example, there is no interest involved and all trades must be made within the same day. Trading with traditional brokers is haram because of the interest that's charged.
Is Forex Trading Halal or Haram?Cryptocurrency
Investing in cryptocurrency is a relatively new concept and is still being debated by Islamic scholars. However, there are a few shariah-compliant cryptocurrency exchanges that have been approved by the AAOIFI. These exchanges follow the same rules as Islam forex trading. For example, all trades must be made within the same day and there's no interest involved. If you choose to invest in crypto as a Muslim, only do so through a shariah-compliant exchange.
Precious Metals
Precious metals, such as gold and silver, are also a halal investment idea. That's because these types of investments have intrinsic value and are not subject to speculation. However, it's important to note that some scholars believe that only gold is permissible.
The rest may be haram because they're subject to speculation. So if you're thinking about investing in precious metals, be sure to do your research before taking the plunge. The easiest method to invest in gold that's halal is owning physical gold like gold bars and bullion. Alternatively, you can try gold marketplaces and gold-backed EFTs.
Real Estate
Real estate is a tricky investment for members of the Islamic community because of the many types of interests involved in real estate. For instance, there's the interest charged by the bank when you take out a mortgage. And then there are mortgage REITs ( Real Estate Investment Trusts), where investors profit from interest-based price fluctuations.
While some scholars believe that real estate is haram, others believe that it's permissible as long as the investor is not violating any shariah principles. For example, an Islamic investor cannot invest in a property that's used for gambling or alcohol production. If you're thinking about investing, be sure to do your research and consult with a scholar to ensure that you're not violating any shariah principles.
However, according to some scholars, real estate is permissible if the property is leased and not sold on credit. So if you're thinking about investing in real estate as a Muslim, be sure to do your research and consult with an Islamic scholar to ensure that you're following the proper guidelines.
Haram Investment Options
An investment option is haram if it falls out of line with shariah principles. For example, any investment that is based on speculation is considered haram. Any investment option that's haram is off-limits to people of the Islamic faith. Here are a few haram investment options you should steer clear of.
Bonds
A bond is an investment that's based on debt. When you invest in a bond, you are lending money to a government or corporation. The government or corporation then uses the money you've invested to finance its operations. In return for your investment, they agree to pay you interest.
The problem with bonds is that they're based on speculation. What's more, bond investors also receive interest based on the assumption that the government or corporation will be able to make its payments. If they're unable to make their payments, then you could lose your investment. For these reasons, bonds are undoubtedly haram.
Forex Swap Accounts
Trading forex is an excellent way to make money, either part-time or full-time. However, forex swap accounts aren't permissible for Muslims.
A Forex swap account is a type of account that allows you to trade two different currencies. These accounts are haram because they involve speculation. What's more, the interest you earn is based on the assumption that the other currency will lose value.
There's also the fact that in a forex swap account, two parties agree to trade currencies with each other at an agreed-upon rate. The problem is that the rate is usually based on overnight interest rates, which is not permissible under Islamic law.
Thankfully, there are plenty of Islamic forex brokers that offer swap-free accounts. These accounts are permissible for Muslims because they allow users to hold their position overnight, without charging interest or the swap commission.
Bank Deposits With Interest
When you deposit money into a savings account, the bank agrees to pay you interest on your deposit. The problem is that, in Islam, it's not permissible to charge or receive interest. For this reason, any type of bank deposit that accrues interest is considered haram.
The good news is that there are plenty of Islamic banks that offer accounts that don't accrue interest. These banks typically invest your money in halal ventures, such as real estate or small businesses. In return for your deposit, they agree to give you a portion of the profits they earn. While this may not be as lucrative as a traditional savings account, it completely adheres to all shariah laws and principles.
Halal Investments Top Tips for Beginners
Investing as a Muslim isn't as straightforward as it is for other religions. However, this doesn't mean that all members of the Islamic community are locked out of making profitable investments. You can still make a killing from your investments without doing anything haram. Here are a couple of halal investment tips for beginners.
Build a Diverse Portfolio of Halal Investments
Building a diverse portfolio of halal investments means you're not putting all your eggs in one basket. For example, you could invest in stocks, real estate, and small halal businesses. Not only is this good for diversification purposes, but it also ensures that you're investing in a range of halal ventures.
Of course, you don't have to limit yourself to these three investment options. There are plenty of other halal investments out there, such as Islamic bonds and Sukuk. The key is to find an investment option that fits your risk tolerance and goals.
Steer Clear Off of Speculation
The first and most important rule of halal investing is to steer clear of speculation. Any investment that's based on speculation is considered haram and is, therefore, off-limits for Muslims. Examples of such investments include stocks, bonds, and forex trading.
What's more, investing in speculation can eventually lead to actual gambling, which is prohibited by shariah law. So, if you're looking to make a halal investment, be sure to avoid any investments that involve speculation.
How to start investing?Only Invest in Stocks of Companies With Good Financial Track Records
When it comes to stocks, you should only invest in companies with good financial track records. This is because these companies are less likely to go bankrupt, and you're more likely to make a profit from your investment.
Of course, there's no such thing as a guaranteed profit when it comes to stocks. However, by investing in companies with good financial track records, you can minimize the risk of losing your hard-earned money.
Invest in Index Funds Instead of Speculative Investments
Index funds are a type of investment that tracks a basket of stocks. This is a good option for Muslim investors because it's a halal way to invest in the stock market without speculation.
What's more, index funds are a great way to diversify your portfolio. This is because they allow you to invest in a range of stocks without having to invest in each one individually.
Invest in What Matters to You and Your Community
Another important rule of halal investing is to invest in what matters to you and your community. That's because your investments should align with your values and beliefs.
For example, if you're passionate about environmental issues, you could invest in green energy companies. Or, if you want to help the less fortunate, you could invest in charities or social enterprises. By investing in what matters to you, you can make a positive impact on the world while also making a profit.
Are Cryptocurrencies Halal?
There's still a lot of contention surrounding the compliance of cryptocurrency with shariah laws. On one side of the spectrum, there are those who argue that cryptocurrency is halal. On the other side, there are those who believe that cryptocurrency is haram. However, there's also a middle ground. Some Islamic scholars have argued that cryptocurrency is permissible if it's used for investment purposes and not speculation.
Is Crypto Trading Halal of Haram?What Cryptocurrencies Are Halal?
So, what cryptocurrencies are halal? Well, there are a few that have been deemed permissible by Islamic scholars. These include Bitcoin, Ethereum, Litecoin, and Ripple. The said cryptocurrencies are halal since they don't breach any of the shariah principles.
Read also: Is copy trading halal or haram in Islam? in the TU article.
Best Islamic Account 2024
Not all traditional trading accounts are halal and shariah-compliant. That's why certain brokers have Islamic accounts specifically designed for Muslim traders. We concluded that eToro is the best Islamic account for 2023. Let's take a brief look at it.
Best Forex Swap Free (Islamic) AccountsAbout eToro Islamic Account
eToro is a popular social trading and multi-asset brokerage platform with over 17 million active users. It offers an Islamic account, which is a swap-free account that is compliant with shariah law. The eToro Islamic account is available to Muslim clients from countries such as Malaysia, Indonesia, Turkey, the UAE, and Saudi Arabia.
Some top features of the eToro Islamic account include:
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No swap or rollover fees
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No commission on trades
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Access to a wide range of markets, including stocks, ETFs, commodities, indices, and cryptos
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User-friendly platform with advanced charting tools and social media integration
If you're looking for a shariah-compliant Islamic account for all your trading needs. Look no further than eToro. It's the perfect platform for Muslim traders who want to invest in a wide range of markets without speculation or breaching shariah laws.
Summary
As a member of the Islam community, it's your responsibility to ensure that your investments are halal. That's the only way to ensure that you're not violating shariah law and putting your religious beliefs into jeopardy.at risk.
Thankfully, there are plenty of halal investment options available, so there's no excuse for investing in anything that's haram. By following the tips above, you can make sure that all your investments are halal and compliant with shariah law. Otherwise, we wish you all the best with your halal investments.
FAQs
Is trading haram in Islam?
No, trading is not haram in Islam. However, you must ensure that your investments are halal and compliant with shariah law.
What is the best Islamic account?
The best Islamic account for 2024 is eToro. It's a swap-free account that is compliant with shariah law and offers a wide range of markets to invest in.
Can I invest in the stock market as a Muslim?
Yes, you can invest in the stock market as a Muslim. However, you must ensure that your investments are halal and compliant with shariah law. Investing in stocks is one of the best ways to grow your money.
Is leverage trading haram?
Trading with leverage is haram if you yourself borrow the money to trade. However, if the platform leverages its own money, then it's not haram and is perfectly halal.
Team that worked on the article
Andrey Mastykin is an experienced author, editor, and content strategist who has been with Traders Union since 2020. As an editor, he is meticulous about fact-checking and ensuring the accuracy of all information published on the Traders Union platform. Andrey focuses on educating readers about the potential rewards and risks involved in trading financial markets.
He firmly believes that passive investing is a more suitable strategy for most individuals. Andrey's conservative approach and focus on risk management resonate with many readers, making him a trusted source of financial information.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.