Halal Investing

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Benefits and Risks of Halal Investing

Investing according to Islamic principles can offer many benefits to Muslims and non-Muslims alike. Halal investing encourages a disciplined investment process that promotes in-depth security research and monitoring. Generally, the low debt requirements of Islamic screens facilitate a conservative approach that appeals to risk-averse investors.

Halal investing discourages short-term speculation, and some Islamic scholars interpret high portfolio turnover rates (frequent trading) as a type of gambling. Low turnover minimizes portfolio trading expenses, such as broker commissions, while increasing tax efficiency by avoiding rapid buying and selling of securities that can generate taxable capital gains.

The limitations imposed on investment opportunities by Islamic principles potentially creates risk. For example, among the securities researched monthly by Saturna Capital for the Amana Funds, less than half pass the initial screens necessary to be considered halal. Restricting investment choices to a smaller universe means that a halal portfolio may not be as diversified as other portfolios, which may increase the risk of loss. The returns from various market sectors rise and fall at different times. Islamic principles may limit opportunities to gain when prohibited market sectors, such as financial services, rally.

Because Islamic principles preclude the use of interest-paying investments, halal cash reserves cannot be invested in traditional money market funds or deposited in an interest-earning bank account and therefore do not earn income.

Halal Investment Guidelines

Halal investing requires investment decisions to be made in accordance with Islamic principles. As a faith-based approach to investment management, investors often consider halal investing to be a category of ethical or socially responsible investing.

Islamic principles require that investors share in profit and loss, that they receive no interest (riba), and that they do not invest in a business that is prohibited by Islamic law, or sharia. Before investing in a company, it is necessary to evaluate its business activities and financial statements to determine where its primary revenues come from and how its balance sheet is managed. A company that meets certain criteria (mentioned below) would be halal, or permissible. If it does not meet the criteria, it would be haram, or not permitted.

Interpretation of Islamic law as applied to business activities is nuanced, and halal investment guidelines can vary. Many different standards exist, and therefore Muslim investors often rely on guidance from Islamic scholars to help determine whether an investment is halal.

Investments that sharia scholars universally consider unacceptable are companies whose primary business activities violate the core tenets of Islam, including the manufacture or marketing of alcohol; gambling or gaming activities; conventional interest-based financial services; pork and pork products; and pornography. In addition, most sharia scholars advise against investing in tobacco companies.

Islamic scholars have established financial guidelines to determine when a business activity is a core source of revenue and when it is not. For example, the "five percent rule" says that a core business activity is one that accounts for more than five percent of a company's revenue. This reasoning applies to the Islamic prohibition on riba, or interest, as well. If a company's interest-based income or holdings exceed certain limits, then investing in the company is forbidden.

Often, it is not possible to avoid haram business activities. This is acceptable as long as the investment meets the criteria outlined in the Halal Investment Screening section below. However, Islamic scholars agree that Muslim investors must account for any income derived from riba or other haram sources and then give it away to a charity or someone in need. This process is known as "purification" or "cleansing" of tainted investment income. Scholars also agree that purification of tainted investment earnings should be done anonymously so that the donor receives no residual benefit, such as personal recognition or a tax deduction. 

Halal Investment Screening

Halal investment screens help assess whether a company's business activities are halal or haram. The screens facilitate the elimination of haram investments from consideration.

Halal investing screens seek to eliminate

  • bonds and other interest-based investments
  • stocks of companies that have high debt (sometimes referred to as highly leveraged)
  • securities of companies in industries that do not adhere to Islamic principles, such as liquor, gambling, pornography, pork, insurance, banks, etc.

Saturna Capital, adviser to the Amana Funds, employs proprietary screens and an investment process developed in collaboration with Islamic scholars of the Fiqh Council of North America (FCNA), a non-profit organization serving the Muslim community. Saturna uses Amanie Advisors as sharia adviser to certify compliance. In addition to the business sector screens listed above, Saturna Capital applies the following financial screens, seeking to eliminate companies with

  • greater than five percent of their revenue coming from haram sources (the "five percent rule")
  • greater than 33 percent total debt as compared to their market capitalization (trailing 12 month average)
  • greater than 45 percent accounts receivable as compared to their total assets (trailing 12 month average)

If a company fails the screening process it is considered an unacceptable investment. However, halal investment screening is not always straightforward. When considering whether an investment is halal, it is necessary to look deeply into a company's business activities to discover its core sources of revenue, or how it actually makes its money.

A company's industry sector, or part of the economy to which it belongs, may not always tell you the whole story. A computer software company may write programs used in gambling. A company that publishes children's books may also produce books that are considered pornographic. An agricultural producer might sell its crops exclusively to breweries. On the surface, each of these companies may not appear to be haram, but a closer examination reveals otherwise.

Saturna's investment analysts use NEPTUNE® software, developed in-house by Saturna, to screen, grade, and monitor more than 10,000 securities traded worldwide monthly. Securities that receive an "A" grade are subject to further in-depth review prior to purchase.

The halal investment process does not end with a security's purchase. Saturna monitors the securities in the Amana Funds' portfolios for ongoing compliance with halal investing criteria and may sell if they fail screens at a later date. An unaffiliated board of sharia advisers reviews all Amana Funds’ portfolios quarterly to certify that they meet the stringent requirements of the Islamic faith.

Sukuk Investments: Like Bonds, But Halal

Sukuk investment certificates are similar to bonds, but they are not debt-based and thus halal. Islamic principles discourage debt in general; interest payments on debt owed are viewed as usury, exploitative of the debtor, and are thus prohibited (haram). Islamic principles therefore prohibit investment in conventional bonds and other debt securities that generate interest income. Sukuk investments are halal because they seek to generate profit from the investment income of their underlying assets, instead of interest and principal payments. On the surface, sukuk may appear similar to bonds: They have maturities; they may be rated by major credit rating agencies, such as S&P or Moody’s; and they generate regular investment income payments, similar to the coupon payments from conventional bonds. So, what makes sukuk investments halal? They must meet the following CORE Criteria.

The CORE Criteria That Make Sukuk Halal:

C: Compliance with Islamic Principles

O: Ownership of Assets

R: Risk-sharing

E: Exposure to Enterprise Risk

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  Sukuk / Islamic Investment Certificates Conventional Bonds
  • Security obtains a fatwa: Initial and ongoing review by Islamic board; 
  • Underlying assets must be halal (no alcohol, tobacco, pork processing, interest-based finance, etc.);
  • Investor receives pass-through income.
  • No Islamic review or fatwa certifying that security meets halal compliance criteria;
  • Investor receives interest payments.
  • Ownership interests, not debt;
  • Profit from assets is passed through to investors;
  • Principal repayment not guaranteed if value of assets declines.
  • Investor is lender, not owner;
  • Revenue from assets is used to repay debt;
  • Bond certificate guarantees interest and principal payments.
  • Issuer and investor share the risks and rewards of underlying enterprise;
  • Investor returns linked to issuer returns.
  • Imbalanced allocation of risk: issuer contractually obligated to pay interest and repay principal;
  • Investor returns linked to scheduled payments.
  • Investor exposed to business risk;
  • Investors receive a share of profits from the underlying assets and accept a share of any loss incurred.
  • Investor exposed to credit risk;
  • Due to the issuer’s contractual obligations, investors retain greater legal recourse in the event of default.

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For more information about sukuk, read “What Makes Sukuk Halal?” and for more information about the CORE Criteria of Halal Investment Certificates, read “Can Revenue Bonds Be Halal?”

In recognition that many Muslim investors seek the capital preservation and diversification benefits of income-producing investments available to non-Muslim investors via bond mutual funds, Saturna Capital launched the Amana Participation Fund in 2015. At its launch, the Participation Fund was the first of its kind offered in the US, with a portfolio constructed exclusively of sukuk and other income-producing notes and certificates structured to be in accordance with Islamic principles.


Halal Mutual Funds

In 1984, Dr. M. Yaqub Mirza suggested the idea to create the first US mutual fund managed according to Islamic principles, which became the Amana Income Fund. As an active member of a Muslim investing group, Mirza found it difficult and time-consuming to vet securities for his own halal portfolios. He felt a professional investment advisory firm, with greater collective expertise and resources, would be better suited to carry out the complex Islamic screening process. He also felt a mutual fund would be the ideal halal investment vehicle because its structure ensures that investors share in profit and loss.

Today, a variety of halal investment products serve the needs of Muslim investors, including the original Amana Income Fund started in 1986, the Amana Growth Fund started in 1994, the Amana Developing World Fund started in 2009, and the Amana Participation Fund, a sukuk mutual fund, started in 2015. Amanie Advisors Sdn Bhd, an unaffiliated board of sharia advisers, reviews all Amana Funds' portfolios quarterly to certify that they meet the stringent requirements of the Islamic faith. 


Watch Amana Mutual Funds Trust founders, Nick Kaiser and Yaqub Mirza, discuss the creation and history of the Trust.

Halal Certifications


Further Reading in Islamic Finance

Want to learn more about Islamic investing? Saturna Capital and the Amana Funds are a great place to start! Visit the Amana Funds to access content covering a variety of topics including what makes investments halal, investing and zakat, whitepapers on sukuk and other topics, videos, tax implications, and more. For even more in-depth information, Saturna Capital's executive vice president Monem Salam collaborated with Virginia Morris of Lightbulb Press to create A Muslim's Guide to Investing & Personal Finance and Amana Mutual Funds Trust board chairman M. Yaqub Mirza wrote Five Pillars of Prosperity, Essentials of Faith-Based Wealth Building.

A Muslim's Guide to Investing & Personal Finance
Five Pillars of Prosperity

A Muslim's Guide to Investing & Personal Finance
by Virginia Morris in collaboration
with Monem Salam MBA

Five Pillars of Prosperity
Essentials of Faith-Based Wealth Building

by Dr. M. Yaqub Mirza


Investing and Zakat

Zakat is a form of charitable giving required by the Islamic faith. Every Muslim whose wealth meets a certain minimum threshold must annually purify the total sum of their wealth through charitable donations to specific causes. For more information on zakat, and how Saturna Capital can help calculate it for your investment, please refer to our Investing and Zakat page.