Shariah law covers everything from dietary restrictions to the building of communities, and everything in between. So, it should be no surprise that they also extend to the realm of finance.
Islamic investing, which is often referred to as “Shariah-Compliant Investing,” is a financial strategy in direct alignment with Islamic law. In Shariah Compliant investing, certain types of investments are restricted as a result of it’s four main principles.
Avoiding the payment and receipt of interest
There is an Islamic belief that money holds no intrinsic value. Instead, it should only be used as a medium of exchange, store of value, or unit of measurement. Therefore, attempting to charge or collect “Ribâ” (interest) would display a belief that money in and of itself is valuable, making it prohibited.
Investing ethically and morally
Many things which are prevalent in today’s culture, such as gambling, tobacco, adult materials, and alcohol, are outright forbidden by Islamic law. Therefore, one cannot gain any benefit from these forbidden things, which extends to the realm of investing. Gaining monetary benefit from an investment in something like alcohol or tobacco goes against Islamic principles, which tend to promote strong morality and ethics for society at large.
The laws of Islam are quite stringent on treating all parties fairly in a business transaction. Everyone participating in a financial transaction must be adequately aware of all information, such as price or quantity, which must be clearly determined at the outset of any transaction. Investments which hide vital information or financial details from any party are restricted, as are those which are based on future outcomes which are uncertain for any party involved. This rules out speculative investment vehicles such as options and futures which are seen as having significant ambiguity and/or uncertainty.
Many investors seek out speculative investments in hopes of significant returns. However, this does not align with the laws of Islam, which advise investors to steer clear of speculative investments. This relates to the outright prohibition against gambling in Islamic law, but in finance it’s used to forbid investments in highly speculative assets where wealth is obtained by chance, and not by direct effort. Speculation is seen as leaving financial outcomes to chance, which is viewed as a form of gambling under Islamic law.
Islamic investing today
Today, there are a variety of tools and resources available to those looking to invest according to Islamic law. Wahed Invest is an automated investing tool for investors looking to comply with Islamic investing laws. Wahed uses an ethical review board which screens all potential investments to determine their viability based on Islamic law. Investors make a deposit and note their risk level, and Wahed automatically invests in a diversified Shariah-compliant portfolio. In this way, resources such as Wahed allow Islamic investors to earn profits in a way that is directly in line with their religious beliefs.