Halal Ninja Your guide to halal investing

Breakdown of Asset Classes

In this post, I’ll walk through some of the most popoular investment assets. Think of this as a menu of all the things you can invest in! 🍣

Different ‘assets’ have different periods, and different risk profiles. We’ll give each asset the post it deserves in the near future … this post is to give you an overview so you know where we’re headed!


The Popular Two

We’ll start by running through the most popular two assets, Shares and Lending.

Equities (Shares)

Shares are essentially tiny pieces of a company (literally, like a ‘share’ of the company). When you buy a company’s share, you’re betting that the future of the company is brighter than what people think it is today.

As you might have expected, buying shares is halal1 only if the company you’re buying is considered halal. There are some obvious tells (e.g. a company that sells alcohol is obviously not halal), but the operations of most companies aren’t so clear-cut. We’ll discuss the different ways to assess if a company is halal or not in a future post.

It’s also worth noting that there are multiple ways to buy shares, at different stages of a companies life. Most people know about the public markets (or ‘stock exchange’), where shares of public companies are exchanged amongst buyers and sellers (like Google, Facebook or Tesla). However, many people don’t know that you can also buy shares before a company becomes public (i.e. before it’s listed on a stock exchange). These are known as ‘private shares’, an exciting topic we’ll discuss in a future post!

Fixed Income (or ‘Lending’)

Another class of assets involves lending. Here, you lend money to a company, that will pay you back a profit over a period of time.

Traditionally known as ‘bonds’ or ‘fixed income’ (which are not halal because they involve the use of interest), Sukuk offer a halal alternative. Think of it this way: instead of lenders receiving interest, they pool their money to buy an asset that is then leased to the company. The company, overwhelmed by the generosity of the investors, pays them a monthly fee for using the asset. Eventually, it buys the asset outright at the end of the period, returning the original amount invested2.

Many investment opportunities exist in lending, including lending platforms that connect investors directly with small businesses (kind of like KickStarter), and peer-to-peer (P2P) lending — where people can lend money to one another.

We’ll dive into these use cases in much more detail at a later time.

Alternative Investing

Real-estate

It doesn’t get more traditional than real-estate! You buy an apartment or a house, and rent it out for a monthly amount, eventually (hopefully!) making back more than you paid in roughly 20 - 30 years.

While that may be the most common scenario, there are more modern takes on real-estate investing. These are things like Real-Estate funds (where you invest in a collection of properties, instead of just one) and REITs (similar to funds, but where you can trade shares on a stock exchange!)

Currencies (or ‘Forex’)

The Foreign Exchange (or ‘FX’) market is a financial market where one currency is exchanged for another — somewhat like the currency exchange store you’re used to, but different in one crucial way:

The overwhelming majority of volume on the FX market (over 90%), is driven by speculation. While speculation itself is not sufficient to consider something haram, the fact that it creates risk with no corresponding value, and relies heavily on margin does. The result is that the majority of scholars declare FX trading for the purpose of speculation haram.3

That said, there’s nothing wrong with holding currency. We all hold some money on hand, for things like a taxi ride or buying from the corner store. It’s just another ‘asset’, and it’s (usually) easy to exchange one currency for another.

We can use currencies to protect against risk. If I lived in Argentina, I’d probably want to keep most of my money (and the return from any investments) in USD — since the Argentine Peso has dropped so dramatically vs. the US Dollar.4

Commodities

Commodities are basic goods that can easily be exchanged for other goods of the same type. Think oil, copper, gold — even beef 🐮!

Metals can be traded through physically-backed ETFs. That means you can buy a ‘share’ of Gold through IAU, or a ‘share’ of Silver through SLV — and these shares represent their respective metals physically stored in a vault somewhere. There’s little surprise then that such trades are viewed as being halal by most scholars. Read more about halal ways to trade precious metals here.

The challenge comes with other, less precious, commodities. These are too costly to physically store; instead what most traders do is exchange ‘futures contracts’ (see WEAT for an example of an ETF that trades wheat futures). These types of arrangements, according to the majority of Muslim scholars, are haram.5

Collectibles

Finally, there’s a sort of miscellaneous category that I put all of the other things that don’t quite fit the asset classes I mentioned.

These are somewhat similar to commodities, but they are not fungible (i.e. not equal in quality, so not exchangeable). These are collectibles like sneakers, watches and handbags.6 You may be surprised to hear that these things can be considered ‘investments’; I was too when I’d first heard about it!

I may dig into this asset class more at a later date, but suffice to say that it’s going to be much more difficult to buy/sell these items — due to limited inventory as well as storage costs.

In summary

In this post, we ran through a quick overview of the largest asset classes available to investors. Think of these as ingredients, that you can combine to create your own meal! That meal is your portfolio, and we’ll describe how to put one together in the next post.

  1. You may have also heard about things called ‘options’, a way for speculating on price movements in stocks. We won’t dive into these here, but suffice to say that the majority of scholars consider options to be haram

  2. This is a simplification, for the sake of clarity. The most common type of a sukuk comes in the form of a trust certificate. The organization raising funds first creates an offshore special purpose vehicle (SPV). The SPV then issues trust certificates to qualified investors and puts the proceeds of the investments toward a funding agreement with the issuing organization. In return, the investors earn a portion of the profits linked to the asset. 

  3. There’s an excellent video by Rakaan Kayali that walks through the rationale behind this verdict here 

  4. In Dec 2010, 1 USD was equivalent to roughly 4 ARS. Today, 1 USD gets you over 80 ARS —a decline of roughly 20 times vs the USD! 

  5. Some sources describing this verdict can be found here and here

  6. Cryptocurrencies fall under this same heading, in my opinion. They don’t have any physical representation — but many of them hinge on an element of ‘scarcity’ (including the largest of them all, Bitcoin).