Halal investing versus ethical investing

BY   |  THURSDAY, 16 NOV 2023    5:00PM

Halal investing is a process that aligns with Islamic principles and is sometimes called Shariah investing or Shariah-compliant investing.

Ethical investing, also referred to as socially responsible investing, involves selecting and managing investments based on ethical or social criteria.

The growth of both halal and ethical investing has been driven by the fact that the corporate world is becoming more sensitive to the growing social awareness of shareholders and concern about how corporations contribute to real economic activities.

Halal investing

Halal investing is based on religious belief, which means that all investments must adhere to Shariah principles. Halal investment must therefore follow the principles of Shariah, which means it must be free from prohibited elements, including riba (interest), maysir (gaming) and gharar (uncertainty).

Riba or interest is expressly forbidden in the Quran. Riba is the excess money paid by the borrower to the lender in addition to the principal for the use of the lender's money over a certain period of time. Therefore, financial products bearing the riba element, such as interest-bearing deposits, bonds, private debt securities and money market instruments are considered prohibited, or 'haram'.

Maysir means a way to get something easily and gain an undeserved profit from it, driven by pure chance. For instance, as a game of chance, gambling often leads people to take high risks and behave irrationally in order to 'win big'. In Islam, it is forbidden to take extreme risks and to invest money with a view to achieving a particular outcome but with the possibility of losing money.

Gharar essentially refers to the uncertainty of contractual terms that could lead to the exploitation and deception of people-which in turn could result in litigation and contract manipulation. In addition to the three prohibited elements, halal investment is also based on the principle that Islam prohibits any involvement with illegal activities (haram), this includes actions such as consumption of alcohol, adultery, gambling, tobacco, banks and conventional insurance, and meat-pig. Therefore, the actions of companies contaminated by one of these prohibited elements are considered non-compliant with Shariah.