Halal investing refers to investment activities that comply with Shariah (Islamic law). It requires avoiding prohibited (haram) industries and business practices while ensuring financial structures don’t involve interest (riba) or excessive speculation (gharar).
Beginner
What It Means
“Halal” means permissible in Arabic. Halal investing screens out companies involved in prohibited activities and those with excessive debt or interest income, ensuring your portfolio aligns with Islamic ethical principles.
Practical Example
A halal portfolio might include:
- Technology: Microsoft, Google, Apple (core business is permissible)
- Healthcare: Pfizer, Johnson & Johnson (healing is encouraged)
- Consumer goods: Nike, Procter & Gamble (everyday necessities)
It would exclude:
- Conventional banks: Goldman Sachs, JPMorgan (interest-based business)
- Alcohol: Diageo, Anheuser-Busch (prohibited substance)
- Gambling: MGM Resorts, DraftKings (prohibited activity)
Why It Matters
For Muslim investors, halal investing is a religious obligation—not just an ethical preference. It ensures that wealth generation doesn’t come from activities that harm individuals or society, aligning financial goals with spiritual values.
Advanced
Multi-Layer Screening Process
Halal investing requires both qualitative and quantitative screens:
Qualitative Screens (Business Activity)
Prohibited Industries:
├── Conventional financial services
├── Alcohol production/distribution
├── Gambling and gaming
├── Tobacco products
├── Adult entertainment
├── Pork-related products
└── Weapons manufacturing
| Metric | Threshold | Rationale |
|---|
| Interest-bearing debt / Total assets | < 30% | Limits riba exposure |
| Cash + interest-bearing securities / Total assets | < 30% | Restricts interest income |
| Non-compliant revenue / Total revenue | < 5% | Caps prohibited income |
Halal vs. ESG Investing
| Aspect | Halal | ESG |
|---|
| Foundation | Religious law (Shariah) | Secular ethical principles |
| Oversight | Shariah scholars | Rating agencies, standards bodies |
| Alcohol/Gambling | Strictly prohibited | Sometimes excluded |
| Weapons | Prohibited | Varies by framework |
| Interest | Prohibited | Not typically screened |
| Environmental | Not primary focus | Core criterion |
| Governance | Implicit in Shariah | Explicit criterion |
Investment Universe Impact
Shariah screening reduces the investable universe but maintains diversification:
| Market | Approx. Compliance Rate |
|---|
| Technology | 70-80% |
| Healthcare | 60-70% |
| Industrials | 50-60% |
| Consumer Discretionary | 40-50% |
| Financials | 5-10% |
| Utilities | 20-30% |
Operational Constraints
Halal portfolios operate under specific rules:
| Activity | Permitted |
|---|
| Long positions | Yes |
| Short selling | No |
| Margin trading | No |
| Conventional options | No (Shariah-compliant alternatives exist) |
| Interest-bearing bonds | No |
| Conventional derivatives | Generally no |
Halal investing doesn’t mean sacrificing returns. Academic research shows Shariah-compliant indices have performed comparably to conventional benchmarks over long periods, with different sector exposures providing natural diversification benefits.
Benchmarks for Halal Portfolios
| Benchmark | Coverage |
|---|
| MSCI World Islamic Index | Global developed markets |
| S&P 500 Shariah Index | US large cap |
| Dow Jones Islamic Market Index | Broad global |
| FTSE Shariah Index Series | Regional options |
