Is Investing in The Halal Stock Market Halal?
After extensive research, we’ve created a detailed, step-by-step guide to help you make informed investment decisions without compromising your halal lifestyle.
Whether you’re new to the stock market or seeking to refine your strategies, this guide will equip you with the knowledge to navigate investments while staying true to Islamic principles.
Many individuals within the Muslim community, particularly in North America and other Western regions, hesitate to invest in the stock market due to fear of the unknown.
There’s a common misconception that investing in stocks is inherently haram. While investing in the stock market is not entirely black and white, it is also not wholly impermissible. The truth lies in how you approach it.
Yes, some stocks are haram due to the nature of the companies involved, but there are many ways to filter out these stocks.
In fact, halal investing is very achievable, especially with the right tools and resources. Throughout this guide, we’ll cover seven essential steps to help you ensure that your investments are halal. You’ll also learn about some apps and services that can make this process easier, as discussed in Step 6.
7 Steps to Determining Halal Stocks
Not all companies listed on the stock market are halal. However, by following these seven steps, you can confidently determine which stocks meet halal investment criteria:
- Find Out If the Company Is Halal or Haram
- Invest in Socially Responsible and Conscious Companies
- Remember the 33% Debt Rule
- Ensure Cash Holdings of a Company Are Less Than 33%
- Only 5% of Haram Revenue Is Permissible
- Use Investment Services That Offer Halal Stocks & ETFs
- Always Conduct Additional Research
Step 1: Find Out If the Company Is Halal or Haram
The first and most critical step is identifying whether the company you’re interested in is engaging in haram activities.
Companies involved in prohibited industries, such as alcohol production, gambling, or interest-based lending, are haram to invest in.
When you purchase shares, you become a partial owner of the company, which means you are supporting their business activities and indirectly endorsing their practices.
Here’s a list of industries commonly considered haram, along with explanations of why:
| Industry | Why It’s Haram |
|---|---|
| Interest-Based Companies | Interest (Riba) is forbidden in Islam as it is considered exploitative and unjust. Riba widens the wealth gap by taking advantage of the poor. |
| Alchl | Consumption of intoxicants like alcohl is prohibited in Islam. |
| Tobacco | Tobacco consumption harms health, and promoting its sale is considered haram. |
| Pork | Islam strictly forbids the consumption of pork. |
| Gmbling | Gmbling encourages reliance on luck rather than effort and hard work, which goes against Islamic teachings. |
| Wpons | Investing in companies producing wpons, especially wpons of mass destruction, is haram as they often result in the killing of innocents. |
| Adt Film Industry | Engaging in or supporting this industry is strictly forbidden in Islam. |
| Cloning | Considered an interference with Allah’s creation, cloning is viewed as haram in Islam. |
There are additional haram industries not listed here, but if you are ever unsure about a particular company, it’s wise to consult a qualified scholar or Islamic finance expert.
READ ALSO: Is It Haram or Halal To Work in a Bank?
Step 2: Invest in Socially Responsible and Conscious Companies
Beyond ensuring that a company avoids haram industries, it’s important to assess whether the company is socially responsible and aligns with Islamic values.
This involves considering the company’s ethical practices, such as its stance on environmental sustainability, workers’ rights, and corporate responsibility.
While this doesn’t require visiting factories or conducting in-depth investigations, doing basic research can help.
For instance, if a company is known for exploiting labor or polluting the environment, it may not align with your values as a Muslim investor. Remember, when you invest in a company, you are also investing in its morals and principles.
Step 3: The 33% Debt Rule
A key aspect of halal investing is understanding a company’s financial structure, particularly its debt. Islamic scholars have established that a company’s debt level should not exceed 33% of its total assets for it to be considered halal. This rule is based on Quranic principles stating that one-third is a large portion.
When analyzing a company’s debt, consider both short-term and long-term interest-bearing liabilities, as well as any interest-bearing securities it holds.
Companies with excessive debt are generally not aligned with halal investment principles because your investment may indirectly support their interest-based loans.
Step 4: Cash Holdings of a Company Should Be Less Than 33%
According to Islamic finance guidelines, a company should have less than 33% of its holdings in interest-bearing accounts or securities.
This ensures that the company is not earning significant income from interest, which is forbidden in Islam. Cash holdings and investments in haram financial products should also be minimized.
Be mindful of cash deposits, government bonds, short-term securities, and other interest-based instruments when evaluating a company’s financial health.
A company with excessive cash may be involved in unethical or non-transparent activities, such as money laundering or tax evasion.
Step 5: Only 5% of Haram Revenue Is Permissible
You might wonder how it’s possible to invest in a company that generates any haram revenue. Islamic scholars have established a 5% rule, which permits a small portion of haram revenue. This allowance acts as a safeguard, recognizing that it’s difficult to find entirely halal companies.
For example, a grocery store chain like Walmart may earn a small percentage of revenue from selling pork, but its primary business involves selling general groceries.
The 5% rule acknowledges that minor, unintended involvement in haram activities can be overlooked, provided it does not exceed the permissible limit.
Step 6: Use Investment Services That Offer Halal Stocks & ETFs
In today’s digital age, investing in halal stocks has become easier with specialized apps and services. Apps like Zoya and Islamically have pre-screened stocks, making halal investing accessible for everyone.
These platforms only list companies that meet halal criteria, saving you the time and effort of manually screening stocks.
Alternatively, you can invest in Halal ETFs (Exchange-Traded Funds) or Mutual Funds, which pool together a range of halal-certified stocks.
Services like Wealthsimple offer halal investment portfolios that comply with Shariah law, allowing you to diversify your portfolio while adhering to Islamic principles.
Wealthsimple screens stocks using guidelines set by Islamic scholars, ensuring that your investments avoid industries like gambling, tobacco, and interest-based companies.
Step 7: Conduct Additional Research
While halal investment services and pre-screened ETFs are convenient, it’s always advisable to do your own research.
When considering a new company, look into its business practices, financial health, and ethical standards. Investigate what the media and analysts are saying about the company. Review its “About Us” page and learn about its core activities and values.
This step is especially crucial when investing in newly public companies or those with less transparent operations. Thorough research ensures that you are investing in businesses that align with both your financial goals and religious beliefs.
Final Thoughts: Growing Your Wealth While Maintaining Halal Standards
Investing in the stock market doesn’t have to be daunting or complicated. By following these seven steps, you’ll be able to filter out haram companies and focus on building a halal-compliant portfolio.
Whether you choose to manually screen stocks or rely on halal ETFs, the important thing is to approach your investments with diligence and faith.
We recommend using a halal ETF like Wealthsimple to simplify the screening process and ensure that your money is growing within the boundaries of Islamic law. With the right tools and knowledge, you can successfully navigate the stock market while upholding your values as a Muslim investor.
