Halal investing, in simple terms, means investing in permissible businesses according to the Islamic ethico-legal system or Shariah. There are two main screening levels for halal or Shariah-compliant investments.
Firstly, a business screening is undertaken to review a company’s business practices, products sold, and revenue sources. A company is prohibited from generating returns from the selling or producing of alcohol, pork, products, weaponry, gambling, adult entertainment, or riba (interest). Other considerations include the prohibition of hazard or uncertainty (gharar) such as speculation and the prohibition of investment in forbidden assets (haram).
Secondly, a financial screening is done to ensure that companies have better control on their business and excessive risk taking is avoided. The screening lays out three broad pre-defined ratios, as formulated by AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) standards:
- Conventional debt / Total market capitalization < 30%
- (Cash + Interest-bearing deposits) / Total market capitalization < 30%
- (Total interest + income from Shariah non-compliant activities) / Revenue < 5%
Investments are considered halal if a company passes both the business and financial screenings set out by AAOIFI or by the local Shariah body of scholars. In Malaysia, the Shariah Advisory Council of the Securities Commission Malaysia is the central authority responsible for determining the application of Shariah principles in the local Islamic capital markets.
Why Halal Investing Matter?
For Muslim investors, the option to invest in a halal manner enables them to generate wealth in line with their faith. The interpretation of Shariah law as applied to business activities is nuanced. Since different standards exists, Muslim investors rely on guidance from Islamic scholars to help in the determination if an investment is halal. This allows the Islamic finance industry to thrive as halal solutions are becoming increasingly available in the capital markets.
For non-Muslim investors, investing according to Islamic principles still offer many benefits. Halal investing brings a sense of responsibility on how investments generate returns by preserving a concern for ethics and values. It encourages a disciplined investment process that promotes in-depth research and monitoring to better understand the business.
The financial screening standards also facilitate a conservative approach that appeals to risk-averse investors without compromising on returns.
How To Invest In A Halal Manner?
In this age of digitalization, halal investing has been democratized by the emergence of many options such as digital brokers, online providers of unit trust funds and robo-advisory platforms. This means investors with little financial knowledge may still be able to participate in the Islamic capital markets and learn the ropes on investing from a younger age as the barrier to entry becomes lower each day.
The financial inclusion of the younger and underserved demographics is vital in ensuring that the overall economy continues to grow and remains sustainable.
What Is A Robo-Advisor And Why Should You Care?
Robo-advisors are automated financial advisors. They are an online tool that assists investors in picking an optimal investment portfolio according to their risk tolerance profile. Typically, robo-advisors start by asking investors questions to understand their risk appetite and allocate investments based on certain algorithms.
Once investors agree to the investment allocation, they can start funding their account and the robo-advisors will purchase the underlying securities and manage their portfolio by rebalancing it periodically. Robo-advisors have emerged as favorites to younger demographics due to their low account minimums, low fees, digital-only service and overall, a more efficient and timesaving offering.
About Wahed Invest
Wahed Invest (“Wahed”) is one of Malaysia’s robo-advisors (or digital investment management company) that focuses on halal investing. Wahed was licensed by the Securities Commission Malaysia in August 2019 and launched in October 2019. Since then, Wahed has been offering Malaysians diversified Shariah-compliant investment portfolios that provide exposure to foreign and local equities (via exchange-traded funds or ETF), local Islamic fixed income (via sukuk funds) and gold (via ETF). Further information regarding Wahed’s services can be found at wahedinvest.com, and the Wahed Invest robo-advisory application can be downloaded from the iOS App Store or Google Play Store.