Islamic Investments

Discover our complete guide to Shariah Compliant Investment, it’s key principles and how it works in practice within the social investment sector.

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Shariah Compliant Investing is a type of investment that must follow Islamic Law. It is known as socially responsible investing due to the specific requirement to access the fund that complies with Islamic principles. As charging interest is prohibited, Islamic banks agree to a certain amount of profit or loss from the business.

Like most social investments, a shariah compliant social investment fund will care about both financial return and social impact created for beneficiaries. They will also need to adhere to Sharia Law (Islamic law), which means this type of fund needs to be managed within the core principles of Islamic Faith.

In this blog, we’ll go into the key principles and benefits of Sharia Compliant Investing as well as some examples of how this works in practice within social investment.

Key Principles of Shariah Compliant Investing

Riba is the Islamic term for interest which is prohibited in Shariah Compliant Investing. This is a fundamental principle of the investment practice and in basic terms means that Muslims are encouraged to avoid any kind of investment deals that involve paying or receiving interest as part of the financial terms.

In terms of Islamic law, money is not a commodity but a medium of exchange and a unit of measurement. Money represents purchasing power and cannot be used to increase such power without any productive activity. Islamic finance advocates creation of wealth through industry and labour via trade and commerce.

Haram is an Arabic term in Islam that describes anything that is ‘forbidden, inviolable or sacred’ according to Shariah Law. In relation to social investment, this specifically refers to interest-bearing financial agreements, but could also cover any loans/investments into sectors that cover forbidden activities, including gambling, alcohol, weaponry and some meat-based trading.

Shariah Complaint Investing lends itself to social investment because of the emphasis placed on the social impact delivered to beneficiaries by the investment, alongside any kind of financial return. Any kind of repayable finance will need to be able to plan, measure and communicate the impact they deliver to attract individuals looking to invest in accordance to these principles.

Islamic banking upholds contractual obligations and the disclosure of information as a sacred duty. This is intended to reduce the risk of asymmetric information and moral hazard.

For repayable finance to be Halal (permissible) for investors and beneficiaries, transparency and fairness must be evident throughout every stage of the investment process. We would expect this already from social investors, but in some cases, organisations may need to make fundamental changes to their operation so as to remain compliant, particularly around sharing cost of capital rates.

As with many things, there’s no one-size-fits-all when it comes to Shariah Compliant Investing, and some of the above will be open to interpretation. It is important to remember that people will have different approaches and relationship regards to their faith, so investors should not assume and rather have conversations on a case-to-case basis. Some of the requirements of Shariah Law in financial transactions are: No interest: both parties need to take risk when profit is earned. No ambiguity: contracts should be clear and transparent.

Benefits of Shariah Compliant Investment

By its very nature, social investment adopts Mudarabah, which means that profits, losses and risk is split across stakeholders. Risk sharing also promotes the Islamic value of ‘togetherness’ as both parties carry risk, this protects them both from one of the parties gaining at the cost of someone else. Some of the requirements of Shariah Law in financial transactions are: No interest: both parties need to take risk when profit is earned. No ambiguity: contracts should be clear and transparent.
Shariah compliant investing is designed for the prevention of social harm and the protection of the individual, for example lending money at high rates of interest is impermissible due to the risks of debt, inflation and monopolising investment in the benefit of high-end investors.

Shariah Investment Principles

These principles govern Islamic investment funds and prohibit trading in the shares of companies whose core business constitutes non-permissible activities such as:
  • Interest-based money lending transactions (no money market or bond investments may be used)
  • Conventional insurance business in any form in terms of insurance legislation
  • Embryonic or stem cell research and cloning
  • The manufacture, sale and distribution of alcoholic beverages and tobacco
  • Nightclubs, pornography and gambling, including companies with interests in casinos
  • The sale of non-Halaal meat
  • Trading of gold and silver as cash on a deferred basis
  • Weapons Manufacture and Military Funding