Islamic principles




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Islamic principlesHalal vs. Haram

Like other investors, Muslims look for a diversified mix of investment products to add to their portfolios. But, before they buy, they must determine if a specific investment is permissible.

The Shariah, or Islamic law, requires that before investing in a company, Muslims must evaluate its business activities and financial records to determine where its primary revenue comes from and how income and expenditures are managed. That information allows them to determine if the investment is halal, or acceptable. If not, its haram, or unacceptable.

ACCEPTABLE BUSINESSES

Industry sectors that generally dont manufacture or market forbidden products are considered halal, and are acceptable for Muslim investors. Some classic examples of suitable industries are:

When considering a halal investment, you need to look deeply into a companys business to discover its core source of revenue, or how it actually makes its money. Its industry sector, or part of the economy to which it belongs, may not always tell you the whole story.

THROUGH A SCREEN

To simplify the task of identifying investments that meet specific criteria, financial institutions and analysts put companies through a series of screens, or questions. Islamic screens assess whether the business activities of the company are halal or haram:

If the answer to any of the questions is yes, the company may fail the screening process. That makes its stock an unacceptable investment.

For example, a computer software company may produce products used in gambling. A publishing company might print some works that are considered pornographic. Or an agricultural producer might sell its crops exclusively to breweries.

UNACCEPTABLE BUSINESSES

Islamic law identifies business activities as haram when they generate profits in unacceptable ways. Haram business activities include the manufacture or marketing of any of these products:

Alcohol

Gambling or gaming activities

Conventional financial services

Pork and pork products

Pornography

In addition, most Shariah scholars advise against investing in tobacco companies or those involved in weapons and other defense-industry products. And many classify the entertainment industry in general as haram.

GETTING TO THE CORE

Islamic legal scholars use several conventions to determine when a business activity is a core source of revenue and when it is not. The 5% rule says that a core business is one that accounts for more than 5% of a companys revenue, or gross income. For example, if the sale of alcohol accounts for less than 5% of an airline companys revenue, alcohol is not a core business and investing in that companys stock is generally acceptable.

A somewhat less stringent rule sets the standard for a core business at 10%, and different Islamic scholars may set different limits.

This reasoning applies to the Islamic prohibition on riba, or interest, as well. If a companys interest-based profits or holdings exceed certain limits, then investing in the company is forbidden. Even when these are found to be within tolerable limits, purification of earnings from these companies must take place.

HELPFUL RESOURCES

As increasing numbers of Muslims have begun to invest, an increasing number of resources are available to explain Islamic restrictions and guidelines.

One of the best places to get information is on the Internet. Typing “Islamic investing” into a major Web search engine will bring up many useful sources. These sites often have their own Shariah boards to answer specific questions about Islamic investing. Many also provide answers to the most commonly asked questions.

Another excellent source of information is the mutual fund companies that offer Islamic mutual funds. If you check out the list of companies that these mutual funds own, youll get a sense of the choices investment experts are making.

Their websites provide explanations of some of the key tenets of Islam, explain the investment vehicles they offer to help you reach your financial goals, and publish criteria to help you decide what is allowable and what is not.

SCREENING RESULTS

Recent surveys of the approximately 9,000 companies listed on the London Stock Exchange, the New York Stock Exchange (NYSE), and the Nasdaq Stock Market show that between 75% and 80% of them produce products or services acceptable to Islam. After analyzing the companies financial statements, though, the universe of permissible investments is further reduced to between 3,000 and 4,000 companies listed on US exchanges, in Europe and England, and in Asia, Africa, and the Pacific region.

To identify possible investments, you can check the companies included in a respected Islamic stock index, such as those compiled by Dow Jones, Standard Poors, and MSCI Barra in the United States, and FTSE in the United Kingdom. The indexes may be global or focused on a specific country or region.