You are probably familiar with halal food, but what does halal mean when it comes to investing? Spoiler alert, it doesn’t mean investing in restaurants or spending extra money on kebabs. 

Halal investing is a specialized type of socially responsible or ethical investing, in which investment decisions follow core principles of Islam. Investments and their underlying companies or assets must meet certain criteria related to business model and operations and finances in order to be considered halal or Shariah compliant. In Arabic, "Shariah" (also spelled "Sharia" in English) means "the path to water." This path acts as a code of living that applies to many facets of Islamic life, including donating to charity, praying, observing particular religious rituals and investing.  

Islamic scholars have established financial and operations-related guidelines to determine which investments are considered halal. Here at Wasat, our Shariah advisory board screens the companies behind all of our portfolios’ ETFs to make sure they adhere to the certain guidelines. Investments that Shariah scholars universally view as non-halal--and that Wasat excludes from our portfolios--include: 

Companies whose primary business activities include the manufacture or marketing of alcohol; weapons; gambling or gaming activities; interest-based financial services; pork and pork products; and adult entertainment. Most Shariah scholars also advise against investing in tobacco companies. Wasat views “primary business activities” as any that account for over 5% of a company’s revenue.  

Companies that share in profit and loss and don’t make or receive interest payments (riba). According to Islamic principles,  profiting from interest payments, for instance, as banks profit from interest they charge people on loans, is exploitative and fails to protect borrowers or creditors by placing the burden of risk disproportionately on them. If a company's interest-based income or holdings exceed one-third of its assets or average market capitalization, then investing in the company is forbidden. 

Companies that take on excess debt. Related to the view that interest is exploitative, Islam also encourages pragmatism and sustainability when it comes to taking on debt. Because conventional practices related to interest place disproportionate burden on borrowers, Wasat doesn’t invest in any companies with more than one-third of its total debt as compared to their assets or average market capitalization. The sum of trade receivables and long-term notes receivable also should not exceed half of the total assets or market capitalization of the company. 

Once it's up and running, how will Wasat ensure investments meet halal criteria?  

Before including an ETF or stock in Wasat portfolios, our investment committee and unaffiliated Shariah advisory board will conduct an in-depth analysis of the company’s financial statements, public regulatory filings and compliance practices to confirm it doesn’t fall into any of the three non-halal categories. We will also review the activities and finances of the companies’ affiliates, and Wasat’s own business policies and financial model to ensure we won't charge or profit from interest.  

However, the halal investment process won't end here. Wasat will monitor the securities in our portfolios for ongoing compliance with halal investing criteria and may sell them if they fail screens at a later date. The unaffiliated board of Shariah advisers will review all Wasat’s portfolios quarterly to certify that they continue to meet the principles of the Islamic faith. 

Why invest halal?

Just as everyone loves a perfectly charred kebab, halal investing isn’t just for Muslims. Investing based on Islamic principles encourages a disciplined process and stringent screening of investment products that can result in less volatility and higher returns than conventional investing. As a result of this screening process and its avoidance of certain industries, as well as high-risk or speculative business models, halal investing can be a helpful approach for investors seeking downside protection. 

Does halal investing have any disadvantages?  

You are probably asking yourself, “Don’t high-growth companies need to take on debt?” “Doesn’t prohibiting investment in companies that receive interest payments limit me from making money from lots of stable, well-established banking and finance companies?” “Aren’t conventional corporate and government bonds off-the-table?” “Doesn’t halal screening add to administrative costs and result in lower returns or high fees to clients like me?”  

Here’s how Wasat aims to address these potential limitations. Indeed, Islamic requirements translates into fewer conventional investment choices. However, Wasat offers you high-yield, diversified alternatives, like halal cryptocurrency, a special halal alternative to bonds called sukuk [insert hyperlink to article], real estate investments and ETFs invested in a range of US and international companies.  

Specific to fees, Wasat minimizes fees to users by using algorithm-based investment strategy, so your portfolio doesn’t require constant oversight by a team of financial planners. In addition to limiting the risk of human error, algorithm-based management also lowers overall administrative fees so that Wasat can invest in focused shariah screening by [Saudi Arabia’s] most credible scholars — without a high pass-through cost to you.  

 Halal investing also offers a more structured, exclusion-based approach to environmental, social and governance (ESG) investing. In the absence of standard, universally accepted ESG criteria, screening portfolios based on exclusions provides socially minded investors clarity around what their portfolios include and ensures that underlying companies don’t engage in practices like weapons and tobacco manufacturing. In fact, Wasat's mission extends to making halal investing the mainstream way to ensure everyone can invest in line with their ethics and values.  

Halal investing also helps to protect investors from volatility and down-side risk. For instance, businesses with high leverage tend to see big ups and downs in value during volatile markets. This means that halal investments tend to be more stable in times of economic uncertainty. For instance, the Dow Jones Islamic World Total Return Index, which measures the performance of Shariah-compliant companies, gained 12.98 per cent annualized over the last 10 years through March 31, 2023, while the broader MSCI All-Country World Index rose 11.63 per cent over the same period.

Shariah-compliant funds are less exposed to cyclical sectors such as finance, resulting in greater protection from downturns in conventional markets. Similarly, sukuk, which can be less volatile than conventional corporate bonds, are also decoupled from US markets. So, halal investments offer you an opportunity to diversify your portfolio and protect yourself from market risk. 

As you decide whether halal investment is a good option for you, Wasat is here to help! You can preview how your portfolio could have grown using our Goal Calculator [insert hyperlink] and compare our investments’ historical performance with your own portfolios.