Every individual makes an investment choice to earn a return and to make a difference in the world. The business activity between the final messenger Prophet Muhammad (Peace Be Upon Him) and Khadijah can be seen as an instance where funds were deployed with a nobleman who was known in society for trustworthiness and who was entrusted in preserving the investment whilst making returns to the investor. It is crystal clear in Islam that wealth should be linked to continuous economic activity or circulation without hoarding. Islam has encouraged mankind to disperse through the earth to seek out sustenance and obtain it rightfully:
‘And when the prayer is ended, disperse abroad in the land and seek of God’s Bounty’ (Al Quran 62:10)
A modern experiment of the classical concept of Profit & Loss Sharing in investments was carried out by Ahmad El-Najjar in Egypt as a savings project in 1963 and followed by Tabung Haji project in Malaysia which led to today’s highly developed Islamic Finance market. It is necessary that every investor who is conscious of his / her investment to carefully look at the following seven elements from an Islamic standpoint.
Any investment to be called “Sharia Compliant” has to fulfil the pre-requisites of Islamic principles from investment selection onwards. Investor or investment Agent or Fund Manager should always ensure that the investment will not be involved with the four major prohibitions, namely, Riba, Gharar, Maysir & Qimar. Additionally, the investor should be mindful to keep away his investment galaxy from Sharia impermissible products and services, such as tobacco, alcohol, pornography, weaponry, casino games, pork-related products and anything which will cause harm to people, planet, animals or environment.
It is noteworthy that 82% of the wealth generated last year went to the richest 1% of the global population, while the 3.7 billion people who make up the poorest half of the world saw no increase in their wealth, according to a new Oxfam report ‘Reward Work, not Wealth’ released in January 2018. The concentration of wealth among the richest and most influential within society will deactivate the original function of circulation of money by right investment choices and wealth distribution and charities as prescribed in Islam. From UN’s Millennium (in 2000) to Global Goals (in 2015), initiatives focus on sustainability of social well-being. Similarly, Sharia-compliant investment’s primary focus is that every investment should make a positive impact on social well-being in an ethical and moral way.
As an investor, it is equally important to protect the capital or investment amount as much as ensuring that the investment is Sharia Compliant and also ensures social well-being. AAOIFI Sharia Standard (Number 45) states clearly that ‘It is compulsory for an investment manager, whether he is a Mudarib, an investment agent or a managing partner, in his fiduciary capacity, to exercise due diligence to protect the funds from loss, decrease or destruction. It is permissible to use Shari’ah-compliant instruments and processes to protect the investment from risks, whether they are risks relating to a loss of capital, depreciation in value, inflation, or the fluctuation of exchange rates or any other.
Risk & Reward
“Allah has allowed trade and
has forbidden interest” (2:275)
Earning money based on the passage of time without taking active or passive effort or risk on business or investment activities is not allowed. Interest defined as charging a premium on money lent based on time is just this. There is a very clear prohibition of interest as per the Quranic verse “Allah has allowed trade and has forbidden interest” (Al Quran 2:275). Hence, any Sharia-compliant investor must take part in the risk of the investment activity to enjoy the rewards or return which will be generated by the investment. Taking a calculated risk with all due diligence is perfectly alright to ensure the capital is protected and will yield returns while bearing a certain amount of calculated risk. Investment managers may adequately maintain Profit Equalization Reserve (PER) or any other suitable reserves to ensure risk-reward impact for rainy days.
Profitability vs Liquidity
The investor should consider the flexibility between profitability and liquidity gave current financial climates. Whenever the investor would like to invest more money or pull-out his contribution depending on his financial management requirements, he must be in control of profitability (returns) & liquidity (cash it) to meet his needs. This is a prevailing concern in the investor market where there are investment opportunities which penalize either profitability or liquidity depending on the investment agreement for a different type of investments ranging from real estate investment to Sovereign Sukuk market.
Accessibility & Diversification
Increase in demand for FinTech solutions by Millenials and Smart OMNI delivery channel accessibility to investment for various financial purposes is inevitable given the paradigm shift in the banking & financial market. Notably that the investors are eligible to receive Artificial Intelligence (AI) Robotic Financial / Investment advises with the access to technology. In order to ensure proper financial inclusion, easy accessibility with security is the key. Investors must consider diversification strategy (not to put all eggs in one basket) as a precaution strategy. As an investor, be mindful about the investment accessibility and diversified portfolio of investment for better investment choices.
The beauty of financial inclusion in Islam is such that during your lifetime you have the liberty of your financial decisions within Sharia parameters whilst you will be questioned about how you earned and spent your wealth in the Hereafter. There is an increased hype for Sharing Economy based on Social financing and crowdfunding in the investor market. Zakah is is the third pillar of Islam, motivations behind a charity or spending in the way of Allah are clear indications for a Muslim in his or her efforts to prosper and succeed in both the worlds. However, not only Zakah even Sadaqah which is voluntary charity during the lifetime of an investor is a great mechanism for wealth distribution. Furthermore, Islamic principles emphasise that once a person passes away, the rights of the left investment or wealth belongs to heirs. Waqf (community-based charity) &Warasath (Inheritance) are two more wealth distribution channels to ensure the rights of others in one’s wealth or investment.
When you make your investment choices, be mindful of the above Seven Key Considerations to make a meaningful investment choice so that you can make a difference in safeguarding and sustaining your wealth in the right manner. Fostering entrepreneurial efforts coupled with right investments will enable you to tap into the full potential of talents available on this planet which will – God Willing – unfold the new economic landscape of the future.