Halal Money Matters

Episode 2: What Makes an Investment Halal?

Join hosts Monem Salam, Executive Vice President of Saturna Capital and Portfolio Manger of the Amana Income and Developing World Funds, and Christopher Patton, Videographer and Cultural Attaché of Saturna Capital. In this episode, Monem and Christopher discuss what makes an investment halal, including the history of Islamic investing and various screening methodologies.

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Halal Money Matters Podcast

Episode 02 – What Makes an Investment Halal?

CHRISTOPHER PATTON: Welcome to Halal Money Matters presented by Saturna Capital. I’m Christopher Patton, Saturna’s Cultural Attaché and I’m here again with Monem Salam, Executive Vice President at Saturna. Hello.

MONEM SALAM: Hey, Chris. How’s is going?

CHRISTOPHER PATTON: Good. I’m glad to have you back. I’m glad we’re doing this again.

MONEM SALAM: Yeah, it’s really exciting. The last episode went really well. I think we got to talk a little bit about the “Why?”

CHRISTOPHER PATTON: Just recording it, we had so many things we wanted to discuss, so many avenues we found ourselves wanting to go down that it was not hard to envision a full slate of these, so I’m excited to be back and build on what we talked about last time.

MONEM SALAM: Yeah and you know, if the listeners ever have any thoughts on the topics that we should do, maybe we should kind of invite them to give that feedback.

CHRISTOPHER PATTON: Absolutely. So, in the last episode we did talk about the “Why?” and I think where we left it off was the “How?” So, I think today the idea is to discuss a little more about Islamic Finance, kind of an overview, then maybe get into the details about what makes an investment halal and what can we do in this space.

MONEM SALAM: I think that’s a good idea.

CHRISTOPHER PATTON: Give me… give me, like, the elevator pitch, for Islamic Finance.

MONEM SALAM: So that’s, you know, if you really technically think about it, it actually goes back 1400 years to the time of the Prophet. And the general rule when it comes to finance, and one thing to keep in mind is, that Islam is kind of broken up into two different categories. One is called ibadat, which is the worship, and the other is called Mu’amalaat, which is your daily interactions. And so that’s two different bodies of understanding that are there and part of finance is the daily worship part of it. And the general rule is that anything that God or the Prophet prohibited us from doing, then we’d be prohibited from investing in also. For example, in the Quran, you find the prohibition on gambling and alcohol, so we would not be allowed to invest in companies that are involved in gambling or alcohol. Um, so that’s generally how the guidelines started. And within that area, there’s a larger group, because you know, alcohol and tobacco, those are kind of the smaller areas.


MONEM SALAM: The larger group is actually having to do with both what’s called Riba, which is interest. And the second category, which is called Ghadar, and that’s speculation. So those are two large areas that probably a lot of people talk about the Riba aspect but not the speculative aspect of it. And I think those make up a big section of the Islamic finance as well. So then, fast forward. I think throughout the Ottoman Empire, and you know, all the different empires that happened during the Muslim Islamic States, they did, for the most part, practice Islamic finance from that perspective. When the colonial powers came in, they pretty much gutted out the system and put in their own. And so, if you look at post-colonials, in the 50s and 60s, most of the Muslim countries don’t actually operate under Islamic Finance rules. And that’s something that people talk about. The majority Muslim countries, why don’t they do it? And that’s one of the main reasons why they’re not there. So, there’s a difference between a Muslim country and an Islamic country. And there are really none that are out there right now.

So, in the 1950s and 1960s, a lot of professors and scholars were thinking about this idea of, “How do we bring Islamic Finance back?” The first iteration of that was in 1969 when the Hajj Fund of Malaysia was started and obviously because if you wanna go for Hajj you wanna keep your money pure. So, they wanted to make sure they were keeping their money with Islamic guidelines. And then in 1975, there were two groups. One was in Emirates, The Islamic Bank, started. And also, the Islamic Development Bank. And they you fast forward, in the 1980s, you have different funds in the US that began and then they really took off in the 1990s. Now, the actual guidelines, if you look at it from an investment perspective, which that’s primarily what we’re gonna be focusing on here…


MONEM SALAM: Alright. They’re a function of two things. One is the knowledge of the scholars and what should be and should not be part of the guidelines. And the other part of it is technological advances that have taken place. So, for example, in the 1960s, if you told people to do certain things… if it came to screening out balance sheets, you’d literally have to have human manpower going in, looking at physical copies of annual reports, making those calculations. Well, now that’s done all on EDGAR filings and computers, so it’s a lot easier to do. I think both of those things mirror each other well when it comes to the guidelines.

CHRISTOPHER PATTON: And so, I mean, it seems that the primary act of finding, “What is an acceptable investment?” is to exclude. There’s an exclusionary process that says, “We’re trying to isolate and identify the investments that are permissible.”

MONEM SALAM: Yeah, I mean, I think the guidelines are made up of, let’s say, three categories. And two of them are exclusionary and one is inclusionary. The two exclusionary ones start off on a business screen basis that says, “If a company’s primary business is something that’s haram or prohibited, then that would not be acceptable as an investment.” The second is also exclusionary. Basically, it looks at and says, “What are acceptable ratios of companies that are involved with something that’s forbidden?”

CHRISTOPHER PATTON: And so, by that you would mean a company that’s primary business is one thing but may have a very tiny part of their business that involves some activity?

MONEM SALAM: Yeah that’s one part of it. My classic example that I use is an airline. An airline is in the business of transportation, which in and of itself is permissible, but they do sell alcohol on their planes. So, how much of that would be tolerable from an Islamic perspective? But, the other, bigger aspect of it is, you know, a lot of companies borrow money they have to pay interest on. A lot of companies have cash on their balance sheets, and they get money from that. All of those things have to be taken into consideration as well. There’s a funny story that initially, when the guidelines were being created, one of the scholars said you know, “Debt is really bad. I don’t want companies to pay interest on any company that’s borrowing money.” And so, the practitioners went back, and they did some research and they said, “In the S&P 500, 50 companies actually have no debt on the balance sheet,” which is pretty good. We can make it fairly diversified portfolio from that. But a second scholar said, “Well that’s good too, but I also don’t want companies that have bank accounts, because the banks charge interest. We don’t want that either.” So, Chris how many companies do you think there are in the S&P 500 that have no cash and no debt?

CHRISTOPHER PATTON: Uh… I’m gonna say around zero.

MONEM SALAM: Pretty close. Probably right. So, that guideline didn’t work. That’s where the tolerable limits began to be implemented because the scholars realize that it is not possible otherwise.

CHRISTOPHER PATTON: So, you mentioned the scholars. I’m curious, is there an agreement among scholars? How are these numbers arrived at? Are there differing views?

MONEM SALAM: That’s a good question. I mean, I think that from an overall perspective, I would say there is an agreement. For example, nobody would argue that you should be investing in alcohol companies or those type of things.  at debt to market cap – those should be looked at. What you get into disagreements on would maybe be percentages. Is it 30%? It is 33%? And so, you also look at valuation metrics. So, for example, do you wanna use market capitalization as the value of a company? Do you wanna use total assets and enterprise value? Those are disagreements that are not in form, they’re more in substance. What is the true value of a company?


MONEM SALAM: And I’m sure secular analysts would argue about that as well.

CHRISTOPHER PATTON: Absolutely. So, if companies are changing their business. They’re adding, they’re constantly re-envisioning their businesses, it seems that it would be common for a company to go from halal to haram just overnight. What does that look like? And who’s watching that?

MONEM SALAM: That’s a good point to raise. Companies, either through mergers or acquisitions or change in business strategies can always fall in and out of compliance. As an example, you can use is Amazon. As you know, Amazon, a few years back, received its alcohol license in Washington. So, an investor can look at this and say, “Well, you know they’re eventually gonna get into the business of selling alcohol,” which is not acceptable. And so, you know, they can choose to exit it prior to them selling the first dollar of their alcohol, because there’s plenty of advance notice that was given. Or, that the day that they actually open up their stores is when you can sell it as well. And you know, in retrospect you look at it and say, “Wow Amazon has had a tremendous run after you would have sold it,” but again, these guidelines are set up not for only the pure returns but also based on your heart and what’s gonna happen to you from your values perspective.

CHRISTOPHER PATTON: How widely known in the Muslim community are these guidelines? How widely practiced in this? Is this something that you are constantly educating about?

MONEM SALAM: Yeah, so, you would think that a lot of people would know about it. We’ve been doing this now for quite a few decades. And I think it really became popular in the early 2000s and you know, myself and other people began to go traveling the country and giving seminars and stuff. So, you’d think everyone would know about it. But really, every day we come across people that are like, “We’ve never heard of Islamic Investing before,” and they’re Muslim. And so, it’s a good opportunity for us to keep educating people about what is allowed, what’s not, and what the consequences are. The one thing that I didn’t mention earlier was when I was talking about the screening, I said there were two exclusionary and one inclusionary. So, the third one, which is the inclusionary part, the idea is to really invest in companies doing things that Islam encourages, or even just is good for society. There’s actually a verse in the Quran, which God says, “enjoin in the good and forbid the evil,” and like I say, the past thirty or forty years of Islamic investments, we’ve really only been forbidding the evil. It’s all exclusionary, right? But I think the inclusionary part of it, which is those companies that are doing good, is actually the second part of that verse, which is enjoining in the good. We’re beginning to implement that as well, and it’s really exciting. And again, probably thirty or forty years ago, that probably would not have been possible based on technology. And also understanding the scholars. But now we’re able to do it. I’m really excited about the next ten to fifteen years of seeing where we can go with this.

CHRISTOPHER PATTON: And an added element of that, to me, would be that companies now are doing more reporting on the good with the rise of ESG metrics, companies are more incentivized to demonstrate the good that they’re doing as opposed to just the bottom line.


CHRISTOPHER PATTON: So, we’re seeing more reporting, more numbers, more metrics.

MONEM SALAM: Absolutely and it’s only going to get more and more. And I think the companies that are involved in Islamic investing do have somewhat of an advantage in that we have the screening methodologies in place. We have a formalized structure. For example, if you look at the ESG space, it’s everybody does whatever they want. It’s pretty much all over the place. Whereas in Islamic investing, there is a general consensus, as we were mentioning earlier, that the scholars agree upon, and there’s a formal structure of the scholars auditing the portfolio, making sure you’re following the guidelines, doing all of those things. That’s not there yet in ESG, but I think that’s where our industry can kind of help establish the rules of what that looks like, and that’s really exciting as well. And so I think, generally, if you look at different indices, people always ask the question, “Am I gonna get hurt by investing Islamically or not?”


MONEM SALAM: As one of my colleagues once mentioned, he called it the “COBM”, which is the Cost of Being Muslim, and he was joking around, but you know, is there one? Are you sacrificing returns when it comes to living by your principles? I think the general answer that we’ve found is you’re hurt, or you’re not helped in the long run. What I mean by long term is taking it on a 10-year, 15-year basis. If you look at, for example, an index, and you take that same index but just screen it Islamically, and you look at the performance over a 15-year period, there’s actually statistically no difference between the two. There will be periods when the index outperforms because of certain industries that Islamic guidelines are not allowed to buy—banks and those things—that they will outperform. And in other cases, Islamic-compliant investments will outperform. For example, in a recession, when debt is not looked good upon, obviously in Islamic investing we’re looking at low-debt companies, so we’ll outperform. So, on a period by period basis, it could be either way, but I think on a long-term basis, I think there’s statistically no difference. And “statistically no different” is important for a fund manager, only because it levels the playing field for us to be able to outperform an index and that’s really what active fund management is all about. And so, that’s what we’re trying to do.

CHRISTOPHER PATTON: And when you say you’re taking a long-term view, I mean that’s kinda what we want to be doing anyway, right? With the limitations on speculation? I mean that favors a longer-term investment horizon, right?

MONEM SALAM: That’s correct, I mean people can look at the stock market as a gambling tool or they can look at it as a way to be able to build wealth. And really, the guidelines were set up so that an average Muslim could build wealth over time, with the use of the stock market with small dollar amounts. And so, you know, from that perspective, you do want to keep in mind the long-term, which is, you know, I’m saving for my retirement in 30 years. I’m saving for my children’s education in 20 years. Those are the types of things you can do. Now, you can have short term investments. I want to buy a house in two or three years—how do I save up for the down payment? All of those things are there and these funds in general, investing, Islamic investing, can be used for those purposes but generally speaking, it’s not about day in and day out trading. It’s more about holding it for the long run. So, there are three really great resources, the first one is actually our newsletter that Saturna comes out with—the Yardarm—actually has a good article on Islamic investing and the history behind it. And then there are actually two books that are also on our website, that’s www.saturna.com. The first one is called “A Muslim’s Guide to Investing and Personal Finance” and that one actually goes through and talks about each of the different areas of Islamic finance, not only from investing but mortgages and zakat and 401(k), so it’s a good primer. And the second one is written by Dr. Yaqub Mirza, called The Five Pillars of Prosperity. Both are available on our website if you go there and ask for a copy. Somebody from our office would be happy to mail you one.

CHRISTOPHER PATTON: Yeah, we have a nice form to request those for free to be mailed to you, so that’s a pretty sweet deal.

MONEM SALAM: We have a very special guest that I’m really excited about for the next episode, Owaiz Dadabhoy, who’s our Director of Islamic Investing at Saturna Capital. He’s been involved in the finance industry for a very long time, over twenty years, joined us in 2008, and since then he’s been very active in really educating the Muslim community and like I said, overall, I think he’s a great, great asset and I’m very excited about the next episode.

CHRISTOPHER PATTON: Alright, thank you for being here.

MONEM SALAM: Thanks, Chris.



DISCLOSURES (read by Christopher Patton):

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