The evolution of the stock market has grabbed worldwide attention because it offers a regulated marketplace to investors with zero to low operational risk. Despite having a considerable profit margin, Muslims can only invest in the stock market if Shariah principles are not violated.
Muslims can invest in the stock market, however, there are certain rules under Islamic finance which determine if certain stocks are halal or haram which should be considered prior to investing. Broad-based funds like the S&P500 are considered haram as they contain stocks which aren’t compliant.
Hence, it is important for all Muslims who are interested in this subject to understand how stocks really work. This guide will answer all your queries related to the Islamic perspective of the stock market, so you can proceed without any trace of ambiguity.
Is investing in the stock market haram or halal?
Generally, investing in the stock market is halal i.e. it is allowable. There is a misconception among many Muslims that the sales and purchases in the shared market reflect gambling, hence termed haram, which is not true! The participation of Muslims in the capital market not only improves their financial status but also helps them contribute to the economic growth of their country.
Having said that, the stock market is intricate, so you have to delve deeper to understand this concept. Not every company listed in the stock market is worth your investment. Muslims are permitted to invest in the stock market only if the company’s shares are in accordance with Islamic principles.
Investment in any company involved in haram activities is termed haram. If you wonder why, this is because when you invest or buy stocks in a company, you become its partial owner. You are backing the business and promoting it by providing money and a Muslim must not be a part of a business that produces or sells forbidden (haram) products and services.
For a wider understanding of the stock market for beginners, read my recent post linked here: Does investing in the stock market benefit from compound interest?
Please do note this post makes reference to investing in broad index funds which may be considered haram as detailed below.
Can Muslims only invest in certain stocks in the UK?
Islamic scholars have set a few norms for halal investment and any company that follows these norms are legitimate for Muslims to invest in. This narrows down the list of stocks and investment options for Muslims in the UK.
Companies with unlawful activities in the eyes of Islam such as insurance programs, conventional financial services, stock broking business, and the sale of pork, alcohol, gambling, casinos, and music or movies based entertainment activities are haram. Any company in the UK that generates 95% of revenue from activities other than these prohibited activities is fine for Muslims.
Luckily, the United Kingdom is a hub of Islamic Finance and offers many Shariah-compliant products to the western world. You might be surprised to know that 40% of overall stocks in the UK capital market are termed Shariah-compliant. It means there are more than 300 stocks in this developed market, offering you numerous options to trade in. The number of such halal stocks in the UK stock exchange is expected to rise in the future.
How to work out which stocks are halal in the UK?
After knowing about this decent pool of Shariah-compliant stocks in the UK, you might be wondering about the factors that label a certain stock halal or haram. As mentioned earlier, companies must generate 95% of their income from halal sources to be Shariah-compliant. If the company follows this rule of not crossing the 5% non-permissible income threshold, you need to check if the company also passes through Shariah Financial Screening successfully.
Shariah screening is a method to determine the Shariah-compliance status of a certain company. It helps Muslims to ensure that the company does not surpass the minimum acceptable threshold of conventional debt, interest-based investment, and liquidity.
According to Shariah Investing screening, a debt level of less than 33% makes a company worth your investment because if a company has a lot of debt, it means you are aiding them with their interest-based loans. Likewise, the cash holding of a company must be less than 33% and the receivable compliance ratio of less than 49% is permissible. Moreover, companies with less leverage should be preferred over their counterparts.
- Debt-compliance Ratio: Debt / Market Value of Equity (36 Month average) < 33 %Receivable Compliance Ratio: Accounts Receivables / Market value of Equity (36-month average) < 49 %
- Cash Compliance Ratio: (Cash + Interest Bearing Securities) / Market value of Equity (36-month average) < 33%
- Receivable Compliance Ratio: Accounts Receivables / Market value of Equity (36 month average) < 49 %
If the company confirms the above-mentioned norms, a Muslim can invest in such stocks.
Can Muslims invest in Bitcoin and Cryptocurrency in the UK?
Cryptocurrency has gained a lot of traction in the last few years but its permissibility in Islam is still under debate. Some scholars consider cryptocurrency to be haram because of its speculative nature and having no central authority. On the other hand, some scholars argue that crypto is a digital asset and there is no element of risk, hence it is a halal investment. A publication confirming the legitimacy of bitcoin in Islamic finance opened the market for 1.6 billion Muslims, leading to a sharp increase in its value by more than $1,000 in less than an hour.
Since cryptocurrency is a relatively new concept, there is an ongoing debate on the status of its legitimacy in Islam. People who put bitcoin in the haram bucket argue how bitcoin value surged from mere pennies to ten thousand dollars per coin in such a short span of time. This shows its highly speculative nature which is not encouraged in Islam.
In a nutshell, cryptocurrency and bitcoin are halal if the trader fully understands the term and invests with a business mindset. On the contrary, if a trader goes for it without proper understanding and just generates tons of money, it would be parallel to gambling. If you find a halal investment method with low-risk factors, halal coins, and less uncertainty, you can opt for cryptocurrency.
If you’re deciding whether to invest money in Cryptocurrency or the stock market, check out the following linked post for help in making this decision: Should Beginners Start by Investing in Stocks or Cryptocurrency?
Can Muslims invest in broad index funds, like the S&P500?
Broad index funds are financial methods to estimate the price performance of a set of stocks from the stock exchange. Standard & Poor’s 500 Index, commonly known as S&P500 is one kind of index fund that judges the performance of 500 largest publicly renowned US companies. Trading of these indices allows the trader to diversify their portfolio by asset exposure making their instruments quite famous in the trading circle.
However, trading such index funds is considered haram in Islamic finance because the trader shows ownership of every company mentioned on the indices. This list may contain companies that indulge in haram businesses, which makes indices trading haram. Luckily, there are several Shariah-compliant fund indices available to trade in the UK market, so any Muslim willing to diversify the risks without doubting their faith can go for these funds.
For instance, you can invest in Halal Equity Trust Funds (ETFs). Such investment funds track the performance of halal indices only. They help investors get exposure to the performance of a specific class of assets by not investing directly in the underlying assets.
What is the easiest way for Muslims to invest to be halal?
Before evaluating a certain financial instrument, make sure you have the pure intention of doing business. For instance, if you are looking for an investment opportunity to gain maximum profit quickly, this is non-permissible and highly discouraged in Islam.
You can consider investment services that will help you invest in halal stocks. For instance, there are some Islamic apps such as ZOYA and Islamically. They have already screened the stocks and let you invest only in halal stocks. This can be one of the easiest ways for Muslims to invest in a halal manner. Moreover, you can invest in Halal ETF or mutual funds.
If you are not going for any of them and looking at a new company, do a comprehensive research before making an investment. Know what news agencies or people are saying about the company you are eyeballing, read their “About Us” page, and understand all their policies and activities. This is vital when you are going for a new company or newly traded stock in the market. Make sure the company does halal business, meets the Shariah norms, and is socially responsible.
While meeting the finance and faith, Muslims have to narrow down their list of stocks and investment options. However, you can make a huge profit and diversify your portfolio with the available options without violating Islamic principles.
Trading stocks is not haram as long as the companies are not producing or selling anything that is deemed haram. Likewise, cryptocurrency and bitcoin are legitimate if the investor has a full understanding of blockchain technology and the mindset is not parallel to gambling. Index funds, such as S&P 500 are not halal unless you are using Shariah-compliant indices.
So there is no definitive answer to many of the questions mentioned above, but one common thing is your intentions. Make sure you are investing out of good intentions and there are no greedy reasons behind it. Most importantly, do a lot of research prior to the investment to ensure that the company’s shares are in accordance with Islamic principles. If you have gauged the aforementioned information about halal investing, feel free to start investing today.
Good luck with your halal investment journey.
As always, please remember I am an Accountant, not your Accountant. In this post (and all of my others) I share information and often give anecdotes about what has worked well for me. However, I do not know your financial situation and I do not offer individual financial advice. If you are unsure of a particular financial subject, please hire a qualified financial advisor to guide you.
This article has been written by Luke Girling, ACA – a qualified Accountant and personal finance enthusiast in the UK. Please visit my ‘About‘ page for more information. To verify my ACA credentials – please search for my name at the ICAEW member finder. Please comment below or contact me here to get in touch with questions or ideas for future posts.