Islam is unique in that it realizes the human needs and addresses them, so, to work towards financial independence, and even to dream of a wealthy retirement is not a sin or crime, it is permissible, and even sometimes considered a good deed. The challenge is to escape the sinful temptations of wealth and to use it in donations, Sadaqa and Zakat.
This is one of my favorite topics, it combines a passion (which is Islam) with a profession (which is finance), and it has something for everybody, if you are a Muslim; it is a part of your religious practice, if you are an ethical investor; you’ll find many similarities, even if you are a ”traditional” investor; it will provide you with very useful tools to select an investment as we will discuss shortly.
The general rule is that seeking profit is permissible if you follow the conditions, accordingly; investment in shares is permissible as long as you follow the conditions, but, what are these conditions?
The first condition got to do with the business activity of the company subject to investment decision, the second concerns the financial ratios of interest bearing loans and deposits.
When it comes to the first step in the screening process; which is the activity, the business must not be any of the following non-Halal activities, such as:
Conventional banking and insurance
Non-Halal food
Tobacco, Alcoholic beverages and gambling
Adult Entertainment, Casinos
Manufacturing and trade of weapons
Unlawful activities
At this stage, we can see how this is in line with ethical investing, it does not involve usury, vice or activities that lead to physical or psychological damage to the human.
The next step examines the business metrics to evaluate the performance. And this is what I meant when I said that “it will provide you [the traditional investor] with very useful tools to select an investment”. The criteria for acceptable investment is that:
Liquid assets including cash, short-term investments and receivables / assets < 70%
Total non-permissible income / total income < 5 %
The first and third criteria, aims to reducing the liquid and short term assets in the company, and since liquidity is inversely proportionate to profitability, this will increase the chances of a profitable business, and the maximization of the investor return, the second
criterion reduces the level of interest bearing debt, which on one hand, reduces the interest charges, and improves profits, and on the other hand, reduces debt, and accordingly, reduces the leverage, and all the associated risks of insolvency and bankruptcy.
The forth criterion simply directs investors away from non-halal activities, and by reducing demand on them, entrepreneurs themselves will stop establishing such projects, as the demand for them is low.
Now; we can see that compliant investment does not only aim to the well-being of humans by eliminating evil, and promoting ethical activities, but also; helps you to choose stocks that are less risky and generate more profits. So; from a pure financial prospective; applying those rules should yield higher returns.
One of the things that I can not understand, is how come that such a market like the UK is not attracting enough Islamic capital from MENA or Malaysia, while other markets in the middle east with all it’s structural deficiencies manage to get a share of such wealth?
In the coming episodes, we will try to dig for the UK Shariah compliant hidden treasures, we will select one of the UK stocks, and perform the screening tests, then, calculate the Zakat due on that stock and the cleansing calculations.
I have tried to use a lay person plain English, and to avoid jargon as much as possible, so please; if you have any question, or comment, go ahead, and give your feedback, responses are enabled, this is my first blogging experience, and I need your interaction, because together we will learn more, and be better.
In the coming episodes, we will try to dig for the UK Shariah compliant hidden treasures, we will select one of the UK stocks, and perform the screening tests, then, calculate the Zakat due on that stock and the cleansing calculations.