IMC Shariah
IMC Shariah Compliance:
As the Muslim population globally continues to grow, so too does the appetite
for investing, trading, working within Sharia compliant Gold (dinar) &
Silver (dirham) investments. Halal investing requires the investor to know
all about investment products, and then it is possible to assess if the
investment is in line with Islamic monetary principles. For Muslims, one
of the most critical aspects of Sharia law is ensuring that all income
sources are halal. Islamic monetary finance places huge importance on ensuring
that income is halal (legitimate) as this is enshrined in the Qur’an.
Historically, the focus of halal and haram has been most prominent when
it comes to food, but the concept of halal and haram must also be applied
to all things beyond food including lifestyle, finances, investments, and
business.
Whether Islamic trading involves investing in gold, stocks, commodities,
or fintech, we will examine the concept of halal investments, the principles
of Islamic finance, and the applicability of Sharia law when it comes to
trading, investing and operating within foreign exchange markets for precious
metals and commodities.
WHAT IS SHARIA COMPLIANT OR HALAL INVESTING?
Halal investment refers to the investment/exchange of money in accordance
with Islamic finance principles. Sharia monetary law is centered around
the concepts of social justice, ethics, and using finances to help build
communities. For any Muslim considering halal investment strategies, the
focus should be partnerships that are mutually financially beneficial.
Sharia law lays down principles and regulations Muslim investors must
comply with if they want to invest in halal products such as gold &
silver. According to Sharia rules, compliance with Islamic finance principles
leads to a more ethical and just society. This goes against the western
notion that making money is the ultimate aim for investors. Whilst Islamic
finance does not prohibit making money, it does place emphasis on ethics
and justice, so that a balance is achieved between religion, family, life,
intellect, and property.
Halal investments should not be dismissed by those wanting to generate
income. The Islamic monetary system is not restricting or limiting, it
simply proposes ethical practices and mutual benefit. Halal investments
encourage Muslims to invest responsibly and always ethically. It is still
very possible to make money ethically with the right halal investments.
Investing within Sharia compliant products can potentially reduce the risk
for investors, and is one of the reasons why Muslims worldwide can withstand
the economic turmoil that we are currently passing through.
PAYING AND CHARGING INTEREST (RIBA)
Interest payments, or investments that include an interest element, are
strictly prohibited in Islam. Charging interest is not considered to be
Sharia compliant as it is deemed to be an exploitative practice.
RISK AND UNCERTAINTY (GHARAR)
Sharia rules do not allow participating in contracts where there is excessive
uncertainty or risks. Investing or partaking in any short-selling or uncertain
contracts are forbidden in accordance with Islamic finance principles.
INVESTING IN PROHIBITED ACTIVITIES
For Muslim investors, investment in any business that is involved in prohibited
activities such as gambling, and selling alcohol is prohibited.
SPECULATION (MAISIR)
Sharia law prohibits speculation or gambling. So, if any form of investing
includes contracts where the ownership is dependent on events in the future
that are uncertain, this is deemed to be precarious.
WHAT IS RIBA?
Riba is a key component when it comes to Islamic finance principles. For
Muslim investors, riba plays a central role in the practice of Sharia compliant
financial investing and saving. In Islamic finance terms, riba refers to
the concept of interest, or usury and unjust gains made in the course of
investment, trade and business. Riba is condemned in hadith and the Qur’an.
Linguistically, riba refers to any 'increase' or growth, but the concept
itself is rooted in the notion that riba distorts wealth as the money lender
is able to exploit others and increase their wealth perpetually without
any substantial contribution to society from them selves.
The concept of riba al-nasee'ah that refers to an increase in wealth due
to the passage of time is one of the most common types of riba. Bonds fall
into this category and are therefore not permissible for Muslim investors.
The prohibition of riba is one of the reasons Muslim investors trading
in the financial markets prefer commodity stock investments over other
forms of investing.
BENEFITS OF HALAL INVESTMENTS
As the Muslim economy continues to increase year on year, the Islamic
finance industry is also growing to cater for the need for growing halal
investment options and products. Some of the main benefits of halal investments
for Muslims (and non-Muslims) include the following:
- Social Responsibility - taking a socially responsible approach to finances and investment not only means the investment is Sharia-compliant, but it can also lead to human rights protections, just distribution of wealth, and ethical investments that minimise environmental degradation.
- Less Risk - Islamic finance principles mean that halal investment products are less susceptible to huge market changes and fluctuations. Global crises do not impact Islamic finance as they do more traditional banking. As short term speculation is discouraged in Islam, the exposure is much lower overall.
- Growing wealth in a halal way - this is the most critical benefit for Muslim investors. Not only does halal investment mean that Muslims can engage and involve themselves with global markets, it also means that Muslims partake in disciplined investment that requires ethical due diligence.
CONS OF HALAL INVESTMENTS
As with any type of investment, there are risks alongside benefits. Whilst
Islamic finance does not prohibit risk taking, it does discourage speculative
investments. Some of the risks associated with halal investment include:
- Due diligence - the level of information gathering required for halal investments is far greater than traditional investment. The due diligence takes time and requires attention to detail that not all investors are willing to do.
- Diversification - investing in a halal way requires time and consideration. This often means that the portfolio is not as diverse, or quick to grow, as traditional investments.
GOLD
In terms of investment, gold is considered a safe and traditional means
of investment that is Sharia compliant. Gold often appreciates in value,
is easy to obtain and invest in, and is not deemed to be in breach of any
Islamic finance laws.
PROHIBITED INDUSTRIES
Any halal investment must be in accordance with the Sharia principles
mentioned above, and must be done with consideration of ethics and social
justice. Companies whose main business goes against the central tenets
of Islam are considered universally unacceptable as investment opportunities.
There are certain industries that are deemed to be unethical or at risk
of causing harm to society, and Muslims should therefore avoid opportunities
in these sectors:
- Industries manufacturing, promoting, advertising, or selling alcohol
- Industries manufacturing, promoting, advertising, or selling cigarettes or drugs
- Banking products or financial transactions that include interest (riba)
- Any industries related to gambling
- Industries related to prostitution or pornography
- Industries relating to pork
Sharia law prohibits investing in industries and businesses where at least 5% of their income comes from unethical sources (this is known as the 5% rule). Before investing in any business, Muslims should check out the financial statements and positioning of the company and do some research on their sources of income and profits and where they are derived from.
HALAL INVESTMENT - WHAT TO LOOK FOR
When undertaking due diligence prior to investing, you should consider
the following 3 types of investing opportunities:
- Companies with halal practices - these are known as clean companies (from a halal investment perspective) and are companies that operate in a completely halal way. These companies operate within the Sharia finance rules, and have a clear halal audit trail.
- Companies with haram practices - these types of companies operate within prohibited industries such as gambling and alcohol.
- Mixed companies - these companies may have halal practices but these are mixed with haram practices or activities.
For halal investors, option 1 is always the best option as there is no overlap of the halal-haram considerations. Companies that have a cross-over between halal and haram should be avoided.