Halal investing is of two types primarily, investing in companies, also known as equities or stocks, and fixed income investments like investing in Islamic bonds (Sukuks) or real estate like Manzil’s Halal Incom Portfolio. Both types of investments have to be in line with Islamic principles for them to be halal. These principles are well outlined in the Accounting and Auditing Organization for Islamic Financial Institution’s (AAOIFI) standards.
Many conventional investment products aren’t compliant because they are involved with impermissible (haram) activities or generate interest (riba) as income. For example, profiting off debt is prohibited, so investing in conventional bonds (Government & Corporate) and Guaranteed Investment Certificates (GICs) are not allowed for observant Muslims. Additionally, halal investing prohibits investing in businesses that profit off the following activities:
- Tobacco/Illicit Drugs
- Conventional Financial Services
- Defense / Weapons
- Gambling / Casinos
- Adult Entertainment
This first screen is what is known as a business activity screen and is one step in the screening process. There is also a financial screening process to ensure that these same companies are not deriving significant income from interest (riba) or having excessive debt. The principles of these financial screens are:
- Companies that are directly active in, or derive more than 5% of their revenue (cumulatively) from the above-mentioned activities
- Total debt over total assets should not exceed 33.33%
- The Sum of a company’s cash and interest-bearing securities over total assets should not exceed 33.33%
- The Sum of a company’s accounts receivables and cash over total assets should not exceed 33.33%
If any of these companies exceed one of these percentages or are active in the non-compliant activities listed above, they are deemed to be non-investible.