Halal Investing

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Benefits and Risks of Halal Investing

Investing according to Islamic principles can offer many benefits to Muslims and non-Muslims alike. Halal investing encourages a disciplined investment process that promotes in-depth security research and monitoring. Generally, the low debt requirements of Islamic screens facilitate a conservative approach that appeals to risk-averse investors.

Halal investing discourages short-term speculation, and some Islamic scholars interpret high portfolio turnover rates (frequent trading) as a type of gambling. Low turnover minimizes portfolio trading expenses, such as broker commissions, while increasing tax efficiency by avoiding rapid buying and selling of securities that can generate taxable capital gains.

The limitations imposed on investment opportunities by Islamic principles potentially creates risk. For example, among the securities researched monthly by Saturna Capital for the Amana Funds, less than half pass the initial screens necessary to be considered halal. Restricting investment choices to a smaller universe means that a halal portfolio may not be as diversified as other portfolios, which may increase the risk of loss. The returns from various market sectors rise and fall at different times. Islamic principles may limit opportunities to gain when prohibited market sectors, such as financial services, rally.

Because Islamic principles preclude the use of interest-paying investments, halal cash reserves cannot be invested in traditional money market funds or deposited in an interest-earning bank account and therefore do not earn income.

Halal Investment Guidelines

Halal investing requires investment decisions to be made in accordance with Islamic principles. As a faith-based approach to investment management, investors often consider halal investing to be a category of ethical or socially responsible investing.

Islamic principles require that investors share in profit and loss, that they receive no interest (riba), and that they do not invest in a business that is prohibited by Islamic law, or sharia. Before investing in a company, it is necessary to evaluate its business activities and financial statements to determine where its primary revenues come from and how its balance sheet is managed. A company that meets certain criteria (mentioned below) would be halal, or permissible. If it does not meet the criteria, it would be haram, or not permitted.

Interpretation of Islamic law as applied to business activities is nuanced, and halal investment guidelines can vary. Many different standards exist, and therefore Muslim investors often rely on guidance from Islamic scholars to help determine whether an investment is halal.

Investments that sharia scholars universally consider unacceptable are companies whose primary business activities violate the core tenets of Islam, including the manufacture or marketing of alcohol; gambling or gaming activities; conventional interest-based financial services; pork and pork products; and pornography. In addition, most sharia scholars advise against investing in tobacco companies.

Islamic scholars have established financial guidelines to determine when a business activity is a core source of revenue and when it is not. For example, the "five percent rule" says that a core business activity is one that accounts for more than five percent of a company's revenue. This reasoning applies to the Islamic prohibition on riba, or interest, as well. If a company's interest-based income or holdings exceed certain limits, then investing in the company is forbidden.

Often, it is not possible to avoid haram business activities. This is acceptable as long as the investment meets the criteria outlined in the Halal Investment Screening section below. However, Islamic scholars agree that Muslim investors must account for any income derived from riba or other haram sources and then give it away to a charity or someone in need. This process is known as "purification" or "cleansing" of tainted investment income. Scholars also agree that purification of tainted investment earnings should be done anonymously so that the donor receives no residual benefit, such as personal recognition or a tax deduction. 

Halal Investment Screening

Halal investment screens help assess whether a company's business activities are halal or haram. The screens facilitate the elimination of haram investments from consideration.

Halal investing screens seek to eliminate

  • bonds and other interest-based investments
  • stocks of companies that have high debt (sometimes referred to as highly leveraged)
  • securities of companies in industries that do not adhere to Islamic principles, such as liquor, gambling, pornography, pork, insurance, banks, etc.

Saturna employs proprietary screens and an investment process developed in collaboration with Islamic scholars of the Fiqh Council of North America (FCNA), a non-profit organization serving the Muslim community. Saturna uses Amanie Advisors as sharia adviser to certify compliance. In addition to the business sector screens listed above, Saturna Capital applies the following financial screens, seeking to eliminate companies with

  • greater than five percent of their revenue coming from haram sources (the "five percent rule")
  • greater than 33 percent total debt as compared to their market capitalization (trailing 12 month average)
  • greater than 45 percent accounts receivable as compared to their total assets (trailing 12 month average)

If a company fails the screening process it is considered an unacceptable investment. However, halal investment screening is not always straightforward. When considering whether an investment is halal, it is necessary to look deeply into a company's business activities to discover its core sources of revenue, or how it actually makes its money.

A company's industry sector, or part of the economy to which it belongs, may not always tell you the whole story. A computer software company may write programs used in gambling. A company that publishes children's books may also produce books that are considered pornographic. An agricultural producer might sell its crops exclusively to breweries. On the surface, each of these companies may not appear to be haram, but a closer examination reveals otherwise.

Saturna's investment analysts use NEPTUNE® software, developed in-house by Saturna, to screen, grade, and monitor more than 10,000 securities traded worldwide monthly. Securities that receive an "A" grade are subject to further in-depth review prior to purchase.

The halal investment process does not end with a security's purchase. Saturna monitors the securities in the Amana Funds' portfolios for ongoing compliance with halal investing criteria and may sell if they fail screens at a later date. An unaffiliated board of sharia advisers reviews all Amana Funds’ portfolios quarterly to certify that they meet the stringent requirements of the Islamic faith.

Islamic Screening In Depth

Excerpted from the April 2019 edition of From The Yardarm – Evaluating Islamic Standards: Islamic Investing and its Evolution from Niche to Mainstream.

While the Quran encourages trade and investment – and provides guidance for how Muslims should approach these activities – formalized financial processes did not begin to develop until the mid-20th Century.  As the modern Western financial system grew, banks operating according to Islamic principles popped up as a way to avoid riba (interest), gharar (speculation), and investments in industries engaging in haram activities.  And though Islamic banking was first attempted in Pakistan in the 1950s, it was the success of the Mit Ghamr Savings Bank in Egypt, established in 1963, that paved the way for Islamic finance’s continued growth.1 Additional products and services spread steadily and globally, and “by 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles.”2 The first Islamic index, introduced by Dow Jones in 1997, introduced Islamic investing to a much wider audience; today, there are now a handful of Islamic indices including those offered by Standard & Poor's, FTSE, and MSCI.

Along with financial products and indices, best practices and regulatory bodies have cropped up to serve this growing industry.  When the first Sharia-compliant mutual fund was launched in Malaysia in 1979, the guidelines for Sharia investing were far from standardized.  When the second Sharia-compliant fund was launched in the US – the Amana Income Fund in 1986 – there was still an absence of formal guidelines for investing practices. Then in 1990, several Islamic financial institutions from across the globe gathered to develop and issue industry standards.  It was from these meetings that the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was born; AAOIFI currently has members from more than 45 nations working among several areas of finance.3

By 1991, the year that AAOIFI was formally established, the organization was already somewhat late to the game; investment vehicles across the globe had been operating successfully under a variety of guidelines for years.  Malaysia had emerged as a hub of Islamic finance and one difficulty practitioners faced was finding securities that met Islamic requirements (both in terms of screening for haram activities and finding companies with low levels of both cash and debt).  This led the Securities Commission Malaysia to initially set the bar quite low for Islamic standards.  Many of the financial institutions offering Islamic products had created their own boards – some more conservative than others – and were engaging in meaningful conversations about how best to invest according to Islamic principles using the Quran and Sunnah. In 2013, Securities Commission Malaysia revised their Islamic guidelines to be more rigorous, illustrating the iterative process required for maintaining such standards.  Despite the work it has done to reinforce Islamic finance worldwide, AAOIFI is one of many standards organizations and does not have a leading edge on any standards, or the most righteous answers.

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Sukuk Investments: Like Bonds, But Halal

Sukuk investment certificates are similar to bonds, but they are not debt-based and thus halal. Islamic principles discourage debt in general; interest payments on debt owed are viewed as usury, exploitative of the debtor, and are thus prohibited (haram). Islamic principles therefore prohibit investment in conventional bonds and other debt securities that generate interest income. Sukuk investments are halal because they seek to generate profit from the investment income of their underlying assets, instead of interest and principal payments. On the surface, sukuk may appear similar to bonds: They have maturities; they may be rated by major credit rating agencies, such as S&P or Moody’s; and they generate regular investment income payments, similar to the coupon payments from conventional bonds. So, what makes sukuk investments halal? They must meet the following CORE Criteria.

The CORE Criteria That Make Sukuk Halal:

C: Compliance with Islamic Principles

O: Ownership of Assets

R: Risk-sharing

E: Exposure to Enterprise Risk

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  Sukuk / Islamic Investment Certificates Conventional Bonds
  • Security obtains a fatwa: Initial and ongoing review by Islamic board; 
  • Underlying assets must be halal (no alcohol, tobacco, pork processing, interest-based finance, etc.);
  • Investor receives pass-through income.
  • No Islamic review or fatwa certifying that security meets halal compliance criteria;
  • Investor receives interest payments.
  • Ownership interests, not debt;
  • Profit from assets is passed through to investors;
  • Principal repayment not guaranteed if value of assets declines.
  • Investor is lender, not owner;
  • Revenue from assets is used to repay debt;
  • Bond certificate guarantees interest and principal payments.
  • Issuer and investor share the risks and rewards of underlying enterprise;
  • Investor returns linked to issuer returns.
  • Imbalanced allocation of risk: issuer contractually obligated to pay interest and repay principal;
  • Investor returns linked to scheduled payments.
  • Investor exposed to business risk;
  • Investors receive a share of profits from the underlying assets and accept a share of any loss incurred.
  • Investor exposed to credit risk;
  • Due to the issuer’s contractual obligations, investors retain greater legal recourse in the event of default.

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For more information about sukuk, read “What Makes Sukuk Halal?” and for more information about the CORE Criteria of Halal Investment Certificates, read “Can Revenue Bonds Be Halal?”



1 Abdullah, M., Abidin, U.,  Mohamad, M. T., Mohamad, M. A. The Historical Development of Modern Islamic Banking: A Study in South-East Asia Countries, African Journal of Business Management, November 1, 2013.

2  Economist Editorial Staff. Sharia Calling, The Economist, November 12, 2009.

3  Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).