“Halal” is an Arabic word that means lawful or permitted. While halal is often used in conjunction with food, it can also describe investments that are allowed within the Islamic faith.
Halal investing allows you to invest in the future without compromising on your values, and beliefs and is a growing area of interest for investors.
This expanding sector includes Sharia-compliant investments as well as funds screened through environmental, social, and governance (ESG) factors.
Table of Contents
- Principles of Halal Investing
- Misconceptions About Halal Investing
- Sharia-Compliant Investment Instruments in Singapore
- How to Check if Investment Instrument is Sharia-Compliant
- How to Invest in Your Values: Halal Investing in Singapore
Principles of Halal Investing
- Avoidance of haram industries
“Haram” is the Arabic word for “not allowed” and investing in certain industries is prohibited and off-limits to halal investors. These industries include but are not limited to:
- Alcohol
- Adult entertainment
- Gambling
- Pork
- Conventional finance and insurance
- Weapons manufacturing
- Tobacco
- Free from interest or riba
In Islam, Riba is the additional amount or interest gained on transactions or savings. This includes financial activities or transactions like:
- Loans taken with an interest element (e.g property loan or education loan)
- Interest generated from a savings account
- Interest on any form of borrowing or lending
- Investing in bonds
- Free from gambling or maysir
The Islamic law also forbids gambling or speculation (maysir) which bans you from investments that depend on luck or uncertain future events.
It’s worth pointing out that the concept of gambling is not restricted to games; every action or activity that involves wagering is categorised as gambling.
An example of maysir in the financial market is the conventional insurance model.
With conventional insurance, the policyholder pays premiums to stay insured and protect them from an event that may or may not happen. This speculative nature counts maysir, and because of this, traditional insurance is not Sharia-compliant.
- Free from uncertainty or gharar
Any transactions that involve excessive uncertainty or ambiguity (ghara) goes against the principles of Islamic law.
Examples of gharar include complex derivatives transactions such as futures and options or any forms of speculation like gambling and short selling.
- Ethical and socially responsible
Halal investing is more than just avoiding what is deemed unlawful, it also supports businesses that contribute positively to society and the environment.
Misconceptions About Halal Investing
Halal Investing is Only for Muslims
A prevalent misconception about halal investing is that it is exclusively for Muslims. While it’s true that halal investing guidelines follow Islamic principles, the ethical framework of halal investing is universal and can be applied to mainstream investing.
Halal investing emphasises the importance of investments being ethical and socially responsible which can also appeal to those who are concerned about the ethical impact of their investments.
Halal Investing is More Expensive Than Conventional Investing
Another misunderstanding is that halal investing is more expensive than its traditional counterpart.
However, the reality is that while some halal-specific funds may charge a higher fee, thecost of halal investing is comparable to conventional investing.
Halal Investing Have Lower Returns Compared to Traditional Investments
Many believe the myth that halal investing compromises your returns on investment because of its limited investment opportunities. That is, however, hardly the truth!
To be deemed halal, Shariah-compliant funds weed out companies with copious amounts of debt or partake in excessive risk or speculation, resulting in investors buying some of the best, most ethical and socially responsible companies in the market.
Sharia-Compliant Investment in Singapore
Stocks
Investing in stocks is one of the most common forms of halal investment.
A halal investor needs to verify that the company issuing the stock is Sharia-compliant; businesses that operate in forbidden industries or are deemed excessively risky should be regarded with extra caution or excluded from your portfolio.
Islamic Exchange-Traded-Funds (ETFs)
Like stocks, ETFs, are a popular Sharia-compliant investment instrument. There are Sharia-compliant ETFs on the market that invest in a basket of halal stocks and as another option, halal investors can stick to regular ETFs. The caveat is that you have to be extra careful and take more time to screen a bigger number of companies than if you were to buy an individual stock.
3 Sharia-compliant ETFs To Know
SP Funds S&P 500 Sharia Industry Exclusions ETF (SPUS)
SPUS invests in companies within the S&P 500 index, excluding those that don’t comply with Islamic law i.e. firms involved in alcohol, tobacco, gambling, weapons, pork products, adult entertainment, credit cards, and charging interest.
In compliance with Islamic principles, the ETF also screens out companies with a lot of debt. As such, the companies that are included in SPUS may be more resilient to economic downturns.
The top holdings within SPUS include Apple, Microsoft, Alphabet and Tesla. Overall, the ETF has 215 holdings, less than half of a .
As of 09/30/23 (SP Funds)
In terms of performance, SPUS (35.2%) outperformed SPY (28.6%) in 2021. However, do take note that past performance is not an indicator of future results.
Additionally, SPUS is offered by SP Funds, a fund manager dedicated to halal, Sharia-compliant financial solutions. They manage all their funds according to the rules of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and under the guidance of their ethical advisor, Imam Omar Suleiman.
TCW Transform 500 ETF (VOTE)
VOTE aims to bring about transformational changes in companies through shareholder activism.
VOTE will employ similar methods to effect positive change. The ETF buys shares in 500 of the largest US stocks and aims to lobby other shareholders of these companies to vote in favour of climate change and ESG agendas.
As of 31 December 2023
Unlike conventional ESG funds that only invest in ESG leaders, VOTE tracks the Morningstar U.S. Large Cap Index. By owning large companies like Apple, Amazon, Tesla and Microsoft, the ETF intends to use the shares they own to keep these large companies accountable.
What’s more, VOTE is probably the most affordable ESG ETF in the market. It carries an expense ratio of just 0.05%, similar to most low-cost S&P 500 ETFs.
iShares ESG Aware MSCI USA ETF (ESGU)
ESGU gives investors exposure to large- and mid-cap US stocks with favourable ESG ratings. It’s designed for those who want to build a sustainable stock portfolio for the long-term.
ESGU has a MSCI ESG fund rating of AAA (leader) and excludes companies involved in civilian firearms, controversial weapons, tobacco, thermal coal and oil sands.
As of 15 February 2024
Some of its top holdings include Apple, Microsoft, Nvidia, and Johnson & Johnson.
As of 15 February 2024
Not forgetting the merits of diversification, ESGU provides broad exposure to sectors like information technology, healthcare, consumer discretionary, financials and communication services.
ESGU has an expense ratio of 0.15%, making it one of the cheaper ETFs in the ESG space.
Sukuk
Bonds are based on debt and interest payments (riba) and are not Sharia-compliant. Because of this, halal investors can invest in sukuks as an alternative—Islamic financial certificates similar to bonds and are backed by tangible assets, not debts.
Real Estate
Real estate is a cornerstone of any investment portfolio whether halal or not.
Halal investors, however, need to exercise some caution when dealing with real estate to ensure that the investment is fully halal.
For example, traditional mortgages involving interest payments are not permissible under Islamic finance. Investors must also take extra steps to verify that the real estate is not used to generate haram income.
Commodities
Commodities such as gold and silver are usually considered as investment safe havens. They are also a viable halal investment option since they’re not based on speculation and pose no other halal-related risks.
How to Check if Investment Instrument is Sharia-Compliant
Are you stuck in a dilemma and caught wondering whether an investment is halal or not? This is a question that has plagued many halal investors.
If you find yourself struggling and in the same position, here are some tips on how to check if an investment instrument is Sharia-compliant.
Check How the Company Makes Money
This is the first check that needs to be done.
Halal investors will have to look at the company’s revenue stream and determine if the revenue generated falls within the haram industries like those mentioned above. Businesses operating in these industries should be ruled out completely.
Look Into the Company’s Financial Activities
A halal investor should also screen whether:
- The total value of long and short-term debt is less than 30% of market capitalisation
- The total interest-bearing securities are less than 30% of market capitalisation
- The percentage of total income or revenue generated from impermissible activities is less than 5%
Note:
Values here are obtained based on standards stipulated by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and will vary across Sharia bodies.
Screen Investments with Islamic Finance Apps
Leveraging Islamic finance apps is also a great way for halal investors to evaluate their investments.
These apps are designed to simplify the investment decision-making process and easily verify if an investment is in line with the tenets of Islam, saving you time and effort.
How to Invest in Your Values: Halal Investing in Singapore
You can invest in Sharia-compliant or ESG ETFs through a brokerage platform like Syfe’s Brokerage.
Syfe’s Brokerage makes it easy – and free – to invest in stocks and ETFs. Simply search for the ticker symbol, enter the dollar value you wish to invest, and click on the “Buy” button. On top of the low commission fees, you enjoy free trades each month. Best of all, there’s no platform fee and no hidden fees when you use Syfe Brokerage.
New to Syfe Trade? Get $20 in cash credits when you fund your account with a minimum of S$5,000 and make your first trade! Simply sign up using Singpass to get started.
