Increasing numbers of Muslims require that their investments comply with Islamic teachings on what is permissible and impermissible with regards to finance. Caravel Partners provides Islamic managed portfolio solutions. You can find out more by contacting me at benedict@caravelpartners.net.

What is Islamic Investment?

Investment is allowed in Islam but it must meet the religious criteria laid down by the Quran and Shariah.

Halal is defined as permitted, legal, or lawful in Islam.
Haram, on the other hand, is the opposite of halal. It means impermissible, illegal, unlawful, or sinful.

So the first rule of Islamic Investment is that any asset invested into by Muslims must be halal. Any asset deemed haram is not allowed.

What Classifies As Haram And Halal?

There are certain guidelines provided by religious scholars based on Islamic finance principles which label an investment either as halal or haram.

In the current financial world, hundreds of thousands of investments are offered to the public. Without proper research, selecting a legit halal investment from this wide variety can make you confused. For this reason, a Muslim investor is instructed to learn how to differentiate between haram and halal stocks to manage wealth responsibly.

To help you classify whether the stocks you are offered are permissible for you or not, we have compiled a list of things you should look for before investing.

Riba

Riba, also known as interest, is the critical feature of distinguishing between a permissible and non-permissible investment. Investments that include an interest payment are strictly prohibited and condemned in Islam. The practice concept behind this is the exploitation of others to increase your wealth. A lender usually gives money for a specific time period and takes profit over it, which is known as interest. Stocks mainly do not consist of a riba. This is why Muslim investors prefer purchasing halal stocks. But other investments like bonds containing paying or charging riba are prohibited for Muslims as the profits are received without contributing any effort and exploit the borrowers for personal gains.

Gharar

Gharar or uncertainty is coined from an Arabic word that means ‘to deceive’. Investments or stocks that contain the element of gharar or uncertainty are prohibited for Muslims. In simple words, gharar is the sale of products or assets that are not present. The shariah finance principles do not allow you to partake or invest in stocks with gharar. This is because there is a potential risk for loss, and it might turn out to be a deception to scam your wealth.

Maysir

Maysir is also known as gambling or speculation. This type of investment depends on luck or chance to make a profit rather than working for it through a productive activity. Therefore stocks or other forms of investments that include the element of maysir are labelled as forbidden for Muslims. According to the Islamic finance principles based on creating a just and ethical society, investing in companies involved in producing and selling haram articles is not allowed for a Muslim.

To secure halal stocks or other investments, you need to refrain from investing in companies that are involved in the production of haram items and services such as:

Alcohol and smoking products
Pork
Meat products not slaughtered in a halal way
Weapons of mass destruction
Pornography
Lottery tickets
Machines for haram purposes such as gambling machines
Hoarding of food items for the reselling them at a higher price
Cloning
Entertainment such as movie theatres, music, hotels, etc.
Investing in companies that provide insurance services is also not a halal stock option for Muslims.

Examples Of Industries that Are Usually Halal

Real estate
Transportation and shipping
Medical equipment
Pharmaceutical companies
Homegoods and furniture
Tools

So what can I invest into?
Halal Stocks
Stocks are also referred to as a measure of equity. This is the type of investment in which an investor purchases and owns a fraction of a company/corporation. You can own stocks of either a single or multiple companies. They are primarily purchased and sold through the stock exchange. In simple words, owning a stock means that you own a part of that particular company. An investor who owns stocks gains profits from it when the value of that particular company increases, which increases the value of the stocks at the same rate. But if the value of that company decreases, the stock also falls, resulting in a lesser earning from it. The stock market includes both haram and halal stocks, which you need to research before investing.

Halal ETFs
ETF stands for Exchange Traded Fund. It is a fund consisting of multiple financial securities that track the performance of a certain index or commodity. An ETF is traded like any other security on the stock exchange. Think of it as instead of purchasing a stock, you, along with other investors pool money to purchase multiple stocks in that fund. These are a great way to diversify your risk and is one of the most popular asset classes. An ETF that is halal ensures that the companies in the fund are Shariah-compliant as per the guidelines mentioned above.

Halal Mutual Funds / Unit Trusts
A mutual fund is a collective pool of money invested by several people. They are highly similar to ETFs, with a key difference. These funds are managed by professional fund managers who use their expertise to make sure that the money is used effectively. This means that they will actively look at the assets in the fund and make adjustments to them so that you can make higher returns. However, the tradeoff to this is that the fees are usually higher as well. Similar to halal ETFs, a halal unit trust is just a fund with Shariah-compliant stocks.

Halal REITs
REIT stands for Real Estate Investment Trust. This is a form of real estate where shares are bought and sold on the stock exchange. It is similar to a mutual fund, but unlike a mutual fund, it invests all its money into real estate. It is a good option for those looking to invest in property or even receive dividends from their investments. For a REIT to be halal, it has to adopt the halal investing practices as previously mentioned.

Bonds are Haram
Bonds are certificates of loan issued by the government, private companies, or banks. People buying a bond are certain to receive their capital amount back. In addition to that, the bond issuer will also give additional money accumulated over that time based on the interest rate. Since the additional money is entirely based on interest, bonds fall under the haram category.

The concept of bonds as a whole is haram due to the involvement of riba. However, over the years, many people try to give them different names and change certain aspects of bonds, such as saving certificates, or prize bonds. This does not make it halal in any way. Prize bonds, which are pretty commonly bought, are also not in accordance with Islamic finance. The reason is that these bonds are based on the idea of gambling. Several people buy the bond, and one of them can win the total interest accumulated through a draw. Hence, only one person gets all the money. Since the other people do not know whether they will win more money than invested, this becomes gambling. Hence, it is ultimately haram. Moreover, the ones who do not win, but intend to, are engaging in chancing, which is yet another unlawful practice, according to the Shariah.

Even the acts of purchasing, selling, or dealing in the business of prize bonds are deemed haram by Islamic scholars. This is because these acts are based on haram practices. They also encourage others to engage in haram methods of earning income.

Alternatives for Bonds in Islam
If you’re wondering how to receive dividends or passive income from your investments the right way, we’ve got all the information that you need.

There are several options available when it comes to halal fixed-income options. Below are some alternatives that are interest-free and compliant with Islamic religious values.

Sukuk
Sukuks are a form of bonds that are considered halal. They are commonly referred to as Islamic bonds. However, they differ slightly from traditional bonds to comply with Sharia laws and Islamic principles.

Unlike conventional bonds, Sukuks are not paid as debt. Instead, each bond owner gets an asset, and the revenues generated by those assets are returned to the person. These profits are due to Sukuks smoothing out the current irregular revenues generated by that property. This revenue is provided as an asset to the bond owners and turns them into regular returns.

If there are no revenues, there will be no returns. Hence, Sukuk does not work on interest. Instead, it is based on the concept of ownership, profits, and revenues, which are entirely halal.

It’s similar to purchasing stocks, but instead of owning a share of the company, you own a share in the assets of a company such as equipment, which is then used to generate profits. These profits are then paid out to you as dividends you could use as passive income.

REITs
REITs or Real Estate Investment Trusts is another halal alternative to bonds. REITs allow you to buy a share in different properties and receive the profits in return. These properties can be anything from residential, commercial, office, and industrial buildings obtained through halal means.

Luckily, the concept of REITs is completely halal as they generate profits through their operations. These property owners collect rent, generate profits, and trade different properties through halal means. However, if the REITs are financed via debt and interest, they would be considered haram. Therefore, it’s important to do your research on whether the REITs you’re looking at abides by Islamic principles. The popularity of REITs come from their ability to pay high dividends to investors. So if dividends are what you’re looking for, consider looking for REITs as an alternative to bonds.

Wakalah

The word “wakalah” has several meanings including looking after, delegation, authorization, preservation and performing a task on behalf of other.

Technically, wakalah refers to a type of contract in which one person (the principal), delegates another person to perform some tasks on behalf of him. In other words, it’s an agency contract which authorizes an agent to perform and undertake some dealings on behalf of a principal. There are two contracting parties in a wakalah contract: the principal (also known as muwakkil) and the agent (also termed as wakeel). Basically, wakalah is a kind of responsibility whereas the agent has to discharge his delegated task in the way the principal instructs and consequently makes a known profit.

Why wakalah is needed?

People need assistance to perform certain tasks which they are unable to do themselves. The main purpose of an agency (wakalah) contract is to facilitate economic exchanges and transactions between a principal and third party when the principal is unable to do it personally or he is not willing to perform by himself. Likewise, the agency contract is also needed due to the fact that several times the principal doesn’t have required knowledge, expertise or time to perform certain tasks. In this kind of situation, he needs to delegate someone to discharge some responsibilities on his behalf. For instance, a real estate agent is appointed to sell or purchase a certain property on behalf of the principal. The agency contract is also required in some cases in which someone has to deal with various customers in their different locations.

Types of wakalah

There are two types, general and specific:

A general agency is a type of contract in which a principal delegates full authority to an agent to perform a series of transactions on his behalf. For example, a principal may delegate an agent to purchase the house, lease it to others and collect the rental on monthly basis. A director of a company could be an example of general agency. Because he has full authority to perform a series of tasks on behalf of the company.
A specific agency is where a principal authorizes an agent to do a specific task on behalf of him. For example, someone delegates an agent to sell his car at certain price. In this case, the agent’s authority is limited to sell that particular car at given price.

Ben Carter 30th April 2025