Islamic Investing – The Candid Answer

Wahed Editors

 

To understand Islamic investing, let’s break down Islamic finance as a concept, first. Islamic finance exists to improve or advance the socio-economic status of Islam and its followers. Its founding principle is that money is not an asset one owns, but merely a way to measure worth or value of other goods and services. With it being studied and practised globally, Islamic finance influences its followers’ charitable practices, investing patterns, business and trade conduction, etc. Basis this principle, investing or lending money or capital to generate an income from it is considered ‘haram’ or unlawful.

Historically, this form of investing is an age-old tradition which took birth because of the immense wealth in Islamic and middle eastern countries. Mainly owed to fuel and oil trade, there was a boom in wealth accumulation in certain sects of the community. Considering the widespread reach of trade with routes expanding from land to sea, a basic monitoring tool needed to be put in place[1]. This tool was not to discourage trade or wealth, but to look after the ethical and moral duties of Muslims while they engaged in such businesses.

Practising Islamic finance basically means that the financial institution in question – be it a bank or a person – follows the Sharia law. Since, the Sharia (or Islamic) law treats the ‘spiritual’ and the ‘secular’ as one[2], its rules apply to investments as well. Ergo, someone following the Sharia law must handle finances in accordance with it i.e., all capital raised and lent must be done in a socially responsible manner.

Islamic investments do not permit lending capital if it asks for an interest rate. Unlike most financial and investment processes, this particular method of investing requires its practitioners to share risks at all stages, distributing the risk of uncertainty among all parties involved. These rules or policies, like in most capitalist industries, are made by a board of jurors. They use interpretations of the Quran (Islam’s holy book), the Sunnahs (Prophet’s sayings) and the Qiyas (legal deductions) for reference[3], keeping in mind the interest of all who follow Islam, to make sure no one is exploited[4] based on money.

As this form of finance has made its way into modern-day investments, it has opened up a channel of both criticism and praise. On one hand, there are many arguments made on why regular capitalistic investments are ‘halal’ or lawful, and on the other, there are many non-Muslims engaging with Islamic finance due to its credibility with ethics.

 

 

 

[1] Islamic Finance. (2018). A History of Islamic Finance. [online] Available at: https://www.islamicfinance.com/2015/02/an-overview-of-the-history-of-islamic-finance/ [Accessed 24 Oct. 2018].

[2] L.Ross, M. (2018). [Blog] Working With Islamic Finance. Available at: https://www.investopedia.com/articles/07/islamic_investing.asp [Accessed 24 Oct. 2018].

[3] L.Ross, M. (2018). [Blog] Working With Islamic Finance. Available at: https://www.investopedia.com/articles/07/islamic_investing.asp [Accessed 24 Oct. 2018].

[4] Khan, I. (2018). Why is Interest Haram? [Part One] – Islamic Finance Guru. [online] Islamic Finance Guru. Available at: http://islamicfinanceguru.com/2017/10/22/interest-haram-part-one/ [Accessed 24 Oct. 2018].

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