Find Out If Sharia Investing Is For You!
By, Alexandra DeLuise
What is Islamic Investing?
Sharia investing relies on a few guiding principles:
- Investments cannot profit from debt, so no investing in loans!
- Investors must choose investment funds or companies that make ethical decisions. Companies that profit from tobacco, arms, or pornography are out of the question.
- Investments should be vetted by a sharia review board to ensure that the choices follow halal investing
It is not uncommon to want investment options that match your ethical standards. For some of us, however, religious expectations for money management may not align with many of the traditional options.
Sharia investing can be an answer to those practicing Islam who want their money to grow.
Usman Hayat and Adeel Malik, the authors of a 2014 study of Islamic finance by the CFA Institute explain Halal investing, “Because Islam tends not to distinguish between the temporal and the religious, there is a perennial desire among Muslims to live all aspects of their lives, including the financial, in a manner consistent with their faith.”
The first principle of sharia investing, which is sometimes called halal investing, prohibits investors from investing in debt. This leaves out any investments that involve lending money and collecting interest on this loan. Although, Halal investors can invest in bonds and donate the interest to charity.
Next, the companies that sharia investors choose must be ethical—no companies that deal in products or lifestyles that go against the basic moral principles of the Islamic faith.
In order to ensure that investments adhere to Islamic investing principles, investments are sometimes examined under Sharia review boards or audits. Having a Sharia board oversee investments ensures that they comply with Islamic ethics, so investors can rest easy knowing they are making the right decisions.
Why Should I Care About Following Halal Investing Guidelines?
The ethical choices behind halal investing appeal to Muslims, of course, but can also be attractive investment choices for anyone who holds similar ethical values.
The point of sharia investing is to avoid profiting from “impermissible” sources, such as through companies that make money from pornography or tobacco, and investments that bring back excessive interest—although in the latter case, the excessive earnings can be donated to charity to ensure that the investor still maintains Islamic ethics.
Sharia investing makes sense from a moral perspective. Anyone who is worried about inadvertently funding companies that profit from exploitative, unhealthy, or environmentally-detrimental activities would benefit from pursuing investments that meet halal standards.
Where Do I Start with Sharia Investing?
The good news is that Islamic investing has gotten more affordable for everyday investors. In the past, halal investments were very expensive—some even starting at $200,000 minimum investments!
Now, with the help of robo-advisors, almost anyone can get started with affordable, socially-conscious investment strategies.
What is a robo-advisor?
Robo-advisors are electronic, algorithm-based financial advisors. They offer many of the same benefits of traditional financial advisors, but often come at a more affordable rate. Since there are few overhead costs to maintaining a robo-advisor, electronic financial advising companies can pass those savings on to their investors in the form of low fees and small minimum balance requirements.
Related content: Should you really use a robo-advisor? This millennial thinks so!
Some robo-advisors are even specializing in sharia investing options, including Wahed Invest and Wealthsimple!
Wealthsimple: A Robo-Advisor with Sharia Investing Options
The Wealthsimple robo-advisor stands out with specific halal investing portfolio options and low fund management fees, .50% of assets under management dropping to 0.40% with investments greater than $100,000. Wealthsimple has taken care to design a portfolio option that complies with sharia investing guidelines, which makes this an easy choice for people who want to follow sharia investing rules, but may not know where to start.
Because Wealthsimple has done all the legwork, the Halal portfolio option is not customizable. Bonds are also not permitted in a Halal portfolio, so investors will need to rely on stocks and other investments that comply with sharia investing principles.
Despite having some limitations on types of investments, it is possible to have a diverse portfolio while making halal investment decisions.
Still curious about Wealthsimple? Head over to Robo-Advisors Pro for an in-depth WealthSimple review!
The Takeaway: Sharia Investing Might be for You!
Regardless as to whether you follow the Islamic faith or not, you might find that a halal investment portfolio is right for you.
If you worry about what sort of companies your investments are funding, or if you are adverse to profiting from interest from loans, sharia investing will offer you a way to filter through all the options available and make ethical choices.
Alexandra DeLuise is a freelance writer and teacher who draws on her banking background to write actionable financial tips for real people.