Overview Of Shariah Investing
What is Shariah investing?
Shariah investing, also known as Islamic investing or Shariah-compliant investing, refers to an investment approach that adheres to the principles and guidelines of Islamic law. It is a form of ethical investing that aligns with the values and beliefs of Muslims.
The principles of Shariah investing are derived from the Quran (the holy book of Islam) and the Hadith (the teachings and practices of the Prophet Muhammad). These principles guide Muslims in all aspects of life, including financial matters. Shariah investing seeks to ensure that investments are in line with Islamic ethics and avoid activities that are considered prohibited (haram) or unethical according to Islamic teachings.
What are the key principles of Shariah investing?
In general, Shariah investing offers similar benefits to conventional trading such as vast investment and growth opportunities, diversification as well as access to global trends. However, Shariah-compliant investing typically includes some key principles.
Prohibition of Riba (Interest)
In Arabic, riba means to increase or grow. However, in terms of terminology, riba is classified as an activity in which there is unequal exchange. It means that investors enjoy profits without any effort, and is considered a reprehensible and forbidden activity in Islam. This means that investments in businesses involved in conventional banking, lending, or interest-based financial instruments are not permissible.
Prohibition of Gharar (Uncertainty or speculation)
Gharar is often associated with Al-Mukhtharah (betting) and Al-Jahalah (ambiguity), and is found in Islamic Economics because its activities are included in the buying and selling process. Investments in speculative derivatives, gambling, or uncertain contracts are not considered permissible. Therefore, Shariah-compliant investors should ensure that trading contracts with companies or brokers are clear and concise.
Prohibition of Maysir and Qimar (Gambling/unethical activities)
Maysir and qimar mean gambling, an activity that depends solely on luck and involves betting from both parties, causing profits to occur on one side and losses on the other. Maysir is illegal in Islam, and smart investors should be sensitive to ensure that a stock company does not engage in gambling activities or unethical activities such as money laundering.
Prohibition of Haram Activities
Investments in businesses involved in activities prohibited by Islam are not allowed. These activities may include alcohol, gambling, pork, tobacco, adult entertainment, and other industries deemed unethical or harmful.
How to invest in Shariah-compliant stocks?
First of all, you’ll need to have a basic understanding of Islamic finance and Shariah compliance. Shariah compliance means that a company's business practices and financial activities are in line with Islamic principles.
Next is to research Shariah-compliant stocks, which are stocks screened and approved by Shariah scholars or committees. These stocks should meet Islamic criteria, such as avoiding businesses related to alcohol, gambling, tobacco, or other prohibited industries. A list of these stocks can be found on Shariah-compliant indices like the Dow Jones Islamic Market Index or FTSE Shariah Global Equity Index.
Many financial institutions and brokers offer Shariah-compliant investment accounts and platforms, so make sure to choose a reputable one that offers Shariah-compliant stocks and follows Islamic financial principles.
And as with any investment, it's essential to evaluate the financial performance of the stocks you plan to invest in. Take a look at their earnings, revenue growth, debt-to-equity ratio, and other financial metrics to assess their potential for growth and profitability.
Once you've invested in Shariah-compliant stocks, monitor your portfolio regularly to track their performance and make informed investment decisions.