The word “halal” in its simplest form means “permitted.”
If an object or action is designated as halal, its use is permissible under Islamic law. The opposite of halal is haram, which means forbidden. These terms can be applied to many areas of life, including investing and finance.
Halal investing follows the principles defined by Islamic law.
Three key principles of halal investing prohibit:
- Riba, which is often translated as interest or usury. Basically it refers to an increase in capital without any real services provided. Riba is prohibited on both sides of the transaction – paying as well as receiving interest.
- Gharar, which means risk, or any financial transaction or contract (such as insurance) which includes an element of chance.
- Investing in forbidden (haram) businesses or industries. Examples include companies which derive significant income (defined as more than 5% of their total income) from the processing or sale of alcohol, tobacco or pork. Other prohibited industries are defense/weapons, gambling, pornography and financial firms that charge or pay interest.
In addition, companies selected for investment must also meet financial screens relating to their levels of debt. For example, Azzad’s process screens out companies with:
- Debt-to-market capitalization ratio of more than or equal to 30%
- Accounts receivables ratio of more than or equal to 45%
An additional requirement is to engage scholars who have knowledge of finance to certify initial compliance as well as ensure ongoing compliance.
Azzad Asset Management also employs our own disciplined screening process, automated by our proprietary software, enabling us to monitor compliance with the above investment criteria.