Daei

General Principles of Investing In Islam

Investing is part of mankind's general duty under the Khilafah "vicegerency". The principle of Khilafah treats mankind as God's representative on earth. As part of this obligation, mankind is required to seek of Allah's bounties, spend and manage the wealth bestowed in line with the Shariah. (Al Quran 62:10). However, for an investment to comply with Islamic laws, it must meet the following criterion:

No interest or "price" can be charged on money or any medium of exchange.
Prohibition of speculation and preventable uncertainty "gharar"
Risk sharing (e.g risk can't be entirely transferred to one party).
Ethical, moral and social values.
Prohibition of certain industries like pornography, pork, alcohol, tobacco, gambling)

Islamic law takes the view that money, as a medium of exchange, is not a commodity in itself. As such, its value should be determined by reference to underlying assets money represents. Straight adherence to this system would ensure that all financial transactions are backed by tangible assets. Deviations from this rule encourages arbitrage between money and assets money is supposed to represent. For example, in an interest bearing economy, rational investors will chose to hold money when interest rates are high and asset prices are falling and vice versa. This was evident during the global financial crisis (GFC) and it has the potential of diluting the real the real value of assets in an economy.

COMMON INSTRUMENTS OF INVESTING IN ISLAM

Islam envisages the need for individuals and entities to source funds internally and externally to invest for mutual personal and communal benefits. The following general instruments are prescribed under Islamic laws.

Trustee profit sharing (Mudarabah)
Joint Venture Profit Sharing (Musharakah)
Cost plus profit deferred sales (Ijara)

Trustee profit sharing involves one or more entities providing capital to another to invest. The capitalist risks his capital and the entrepreneur his time and effort. Profits are distributed based on agreed proportions.

In joint venture profit sharing, two or more entities contribute capital for an investment and share in profits and loss in conformity with their capital contributions.

Deferred contracts of exchange are implemented by one entity buying an item, adding profits to its cost and selling it to another with deferred payment terms.

COMPONENTS OF ISLAMIC WEALTH MANAGEMENT

A Muslim has a responsibility not only to seek of Allah's bounties, but to spend it on his family and society in general in ways that conforms to the Shariah, and put in place mechanisms to deal with this wealth after his death. The broad areas of wealth management for a Muslim are summarized below.