While Halal Finance has been around for centuries, it has started to garner increased notoriety in recent years. This is due to the growing number of Islamic banks in the west as well as the spotlight given to Halal Finance at forums such as the World Economic Forum and elsewhere.
What is Islamic Finance? In simple terms, it is banking, financing, and investing which complies with a set of moral laws as laid out in the Qur’an as well as other writings by the Prophet Mohammad. One of the most prominent rules forbids making money from money – i.e. collecting interest.
As such, you might be asking how Halal Investing works? It starts by looking at how risk is shared between the parties involved in the transaction. This includes detailed screening for ‘Riba,’ which is an unjustified increment in borrowing as well as other debt ratios which might not comply with the rules of Halal investment.
Another aspect of Islamic Finance is the moral and ethical ties. These include the emphasis on longer-term relationships, as opposed to the more transactional nature of Western Finance. By doing so, incentives are shifted from short-term gains to those which seek to dissuade cut and run deals.
An example of this are Islamic Finance compliant mortgages. In these scenarios, the bank and the borrower share the risk. Halal bond offering works in the same way with both the issuer and the bondholder owning the debt. This approach ties both parties to the deal and is viewed by Muslims and non-Muslims alike as a more ethical way to do business.
This emphasis on a more ethical approach leads to sensible spending by both parties and is a big reason why ‘smart money’ has shown a keen interest in Halal Finance.
Another thing to know is that these structures are not only meant for Muslims. In fact, many non-Muslims have sought out funding from Islamic banks around the world – not only for consumer finance but also for commercial and industrial situations. The main driver for this is that the terms are often seen as being more flexible than traditional bank loans.
However, Halal Investment is not for everyone. Given the moral nature of these instruments, it is expressly prohibited to use the funds for ventures which would be considered ‘haram’. Examples of this would be using the proceeds of a loan or an investment for a business which is involved with alcohol or pork – though there are other instances where these loans might not fit.
The best way to know for sure would be to talk to a funding source who specializes in Islamic Finance as they will be best positioned to walk you through the entire process.
Why have these instruments started to gain attraction? For starters, there are nearly 2 billion Muslims in the world today. While not all are strictly observant – just like other religions – the fact that Islam is the second largest religion in the world means that there is a massive opportunity to offer alternatives which match the tenants of their religion.
And it’s not just lending. Many exchange-traded funds (ETFs) have cropped up in recent years to cater to investors who are looking for Halal compliant investment opportunities. One example of this is the Dow Jones Islamic Market International Index Fund. There are also a handful of crowdfunding sites and other options as well.
Traditional banks have also been getting in on the act either by offering alternatives as part of their full portfolio of services or by setting up subsidiaries which specialize in this market. All of this points to a growth market which is being driven by the influx of professional investors.
As previously mentioned, the tenants of Islamic Finance have been around for hundreds of years. However, the influx of investment has helped to broaden the offerings for investment and this has helped to strengthen communities across the world. Besides this, the growth has also led to the rise of certified advisors who specialize in ensuring that the plethora of opportunities are not just branding gimmicks but are Halal-compliant.
This brings up an important point for anyone considering investment in this sector – you need to understand what Halal Investment means. If you are not sure, then reach out to an advisor and have them walk you through the process. Doing so will not only ensure that you are following the ‘rules of the road’ but will help to identify any risk factors tied to non-compliance.