If reading this, there is a good chance you already know about Islamic finance. As a quick reminder, this subbranch of finance refers to how businesses and individuals raise capital in accordance with Sharia, or Islamic law.
Keep in mind Islamic beliefs limit the types of investments allows due to the nature of the underlying company or the features of the financial investment. Having said that, it is essential that you understand the basic investment vehicles common in Islamic finance. Some permissible Islamic investments are listed below:
Equities
As per Sharia law, there is nothing wrong with investing in company shares as long as those companies don’t engage in forbidden activities. Investment in such companies may be in the form of shares or by direct investment. Islamic scholars, however, have made some concessions on companies allowed.
After all, most of these companies tend to use debt either to address liquidity shortages or to invest excess cash. Some also choose to exclude companies that hold interest-bearing debt, receive interest or other impure income, or trade debts for more than their face values.
Fixed-Income
Any retiree who would like their investments to comply with the tenets of Islam face a dilemma in that fixed-income investments include Riba, which is forbidden. For this reason, specific types of investment in real estate could offer steady retirement income neither while nor running afoul of Sharia law.
Basic Insurance Vehicles
Traditional insurance is not allowed as a means of risk management in Islamic law. That’s because it constitutes the purchase of something with an uncertain outcome. Insurance companies all take advantage of fixed income- a type of Riba- as part of their portfolio management process to satisfy liabilities.
A possible Sharia-compliant alternative worth trying is cooperative insurance. With cooperative insurance, subscribers contribute to a pool of funds, which are invested in a Sharia-compliant manner. The funds are withdrawn from the pool to satisfy claims, and unclaimed profits are distributed among policyholders.
Be sure to determine how each basic investment vehicle of Islamic finance works before using it to your advantage.
