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Halal Investment Essentials: Risks, Benefits, And Key Screens

 Halal investment is a growing trend that aligns with the values and principles of Islamic finance. It is based on adhering to guidelines that avoid investments in industries or companies that engage in activities prohibited by Islamic law, such as those related to alcohol, gambling, and unethical financial practices. As part of the Institute of Halal Investment, we aim to shed light on the risks and benefits of halal investing, using Saturna Capital’s Amana Funds as a prime example of best-in-class halal investment strategies.



We have known Saturna Capital for over 25 years, and consider them a best-in-class halal mutual fund company. Their commitment to ethical investing aligns perfectly with our vision at the Institute of Halal Investment.

 Mohammad Saeed Rahman, Founder and Chairman, Institute of Halal Investment



Benefits of Halal Investment


Halal investing, rooted in Islamic principles, offers several key advantages for both Muslims and non-Muslims:


  • Disciplined Approach: The process encourages thorough research and careful monitoring of investments, helping ensure that your portfolio is ethically sound and well-managed.


  • Conservative and Low-Risk: Islamic investment principles generally emphasize low debt levels, promoting a conservative, risk-averse approach that is appealing to cautious investors.


  • Focus on Long-Term Growth: Halal investing discourages short-term speculation and high portfolio turnover, reducing trading expenses like broker commissions. This approach also leads to better tax efficiency, as it avoids triggering taxable capital gains through rapid buying and selling.


U.S. Market Example: Ethical Companies Leading the Way


When considering halal investments in the U.S. market, several top companies meet the ethical criteria:


  1. Microsoft: Known for its leadership in technology, Microsoft maintains a strong ethical stance in business practices.


  2. Apple: Apple has long been recognized for its innovation and adherence to ethical business practices.


  3. NVIDIA: A leader in semiconductor technology, NVIDIA exemplifies halal investment principles through its focus on innovation and sustainable business practices.


  4. ASML Holding NY: Known for its cutting-edge semiconductor manufacturing equipment, ASML aligns with halal values by focusing on ethical technology development.


  5. Intuit: As a leader in financial technology, Intuit’s ethical approach to business aligns well with halal investment guidelines.


  6. Broadcom Ltd: Broadcom provides semiconductor solutions and has demonstrated strong ethical business practices, making it a halal-compliant investment.


  7. Novo Nordisk ADS: A global healthcare leader focused on diabetes treatment, Novo Nordisk’s commitment to ethical health practices makes it suitable for halal investing.


  8. Taiwan Semiconductor ADS: As a leader in semiconductor manufacturing, Taiwan Semiconductor meets halal investment principles by adhering to ethical operational standards.


  9. Alphabet: The parent company of Google, Alphabet is known for its commitment to ethical business practices in digital advertising and technology.


  10. Eli Lilly: A pharmaceutical giant, Eli Lilly focuses on improving global health, making it an attractive option for ethical investors.



Risks of Halal Investment


While halal investing offers numerous benefits, there are potential risks to consider:


  • Limited Investment Options: Islamic screens restrict investment choices to ensure they comply with ethical principles. This limited selection can reduce portfolio diversification, potentially increasing the risk of loss.


  • Missed Opportunities: By excluding certain sectors, such as financial services, halal investors may miss out on profitable market rallies in those industries, limiting growth potential during favorable conditions.


  • Income Restrictions: Halal investing prohibits interest-based income, meaning cash reserves cannot be invested in traditional interest-earning funds or bank accounts. This may result in lower income generation compared to conventional investment approaches.


 

Halal Investment Screening


Under the halal investing regime, we look at three important screens to ensure that our investments are compliant with Islamic principles and avoid prohibited activities.


  1. The Sin Screen

    The first screen is focused on avoiding companies involved in sinful activities such as producing pork, alcohol, gambling, immodest, or any form of pornography. Investing in companies with any connection to these industries is strictly prohibited in halal investing.


  2. The Riba Screen

    The second screen involves avoiding companies or financial institutions that deal with Riba (interest). This includes banks that charge or pay interest, as well as institutions that engage in financial practices considered unethical in Islam. Even some so-called "Islamic banks" today might still engage in practices like selling wine in a disguised manner (e.g., wine in Zam Zam bottles), which violates the principles of halal investing.


  3. The Debt Screen

    The third and final screen focuses on avoiding investments in companies that have excessive debt. Halal investing prohibits engaging with companies whose total debt exceeds 33% of their capital structure. High levels of debt can lead to financial instability and are considered haram (forbidden) because of the potential for Riba involvement in debt-related activities.



Final Thoughts


Halal investment is a responsible and ethical way to grow your wealth, offering a meaningful approach to investing while staying true to your values. By using criteria such as the Sin, Riba, and Debt screens, and focusing on ethical companies within US markets, you can confidently navigate the halal investment landscape. The Institute of Halal Investment, under the leadership of Mohammad Saeed Rahman, continues to support and guide investors who wish to invest in a manner that aligns with both their faith and financial goals.

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