Published in · 6 min read · Sep 18, 2019
We answer to a Higher Authority
Shari’a and Halal
Adherents of the Islamic faith must follow the Five Pillars of Islam which guides the Islamic financial system in terms of finance, lending, risk, speculation, ownership, and general business practices. Two words you often hear are halal and Shari’a. The set of Islamic religious laws that governs not only religious rituals but also aspects of day-to-day life in Islam is referred to as Shari’a, the guidance of which then yields activities known as halal, which translates into “permissible”. While many are familiar with the term halal as used in conjunction with dietary food, it is also used in context to investments, which implies a commitment to moral principles and socially responsible investments for the benefit of the whole community, but particularly Islam.
Here are the guidelines from the Seven Pillars Institute for investments in order to meet halal criteria:
· The first and most contradistinctive feature of Islamic finance is there is no concept of the time value of money. A dollar is worth the same today as it is to someone three months from now. This is in stark contrast to the western view of money — a dollar is worth more to me now than it is three months from now. According to modern (western) finance theory, for those three months, I could have that dollar sit in a bank account and earn interest for three months so that once three months have passed, I will have more than a dollar. Therefore, when I am lending money to someone and not getting it back for a period a time, I am to be compensated by the borrower for the opportunity cost of not receiving interest from that money.
· Second, and closely linked to not having a time value of money is the Qur’an’s strict prohibition against the collection of interest or riba, which is sometimes translated also as usury or exploitation. The prohibition stems from the belief that money and profits are earned. The charging of interest is considered unlawful gain, as the financial institution is not really providing any service to the borrower, but is profiting from merely existing and being able to lend money. Some adherents to this belief view people that store their money in banks as hoarders, believing that money is not be socked away in banks earning interest, but should be used to support entrepreneurs and the development of Islamic enterprise.
· Third, risk taking or gharar is to be avoided as much as possible. In an Islamic contract the price, quantity, and time of payment must be known prior to entering into the contract with the other party. This practice ties in to some of the other characteristics of Islamic finance, but may have something to do with the culture and customs of the people that settled the area. The Middle East is home to people whose ancestors were nomadic, tribal people, who lived off of the land and never took more risk than was necessary. This history of risk avoidance seems to continue to play out in the region’s financial sector. However, it is this aspect of Islamic business that we again see the impact that the teachings of Allah. Life insurance, a familiar financial instrument for most in the West, is shunned by Muslims because Allah knows the time and place of each person’s passing, their time on this earth being predetermined. Mechanisms have been developed to help ameliorate the consequences of the risk of death from everyday life, with the focus on zakat, social security, and laws of inheritance that allow people to take care of their family members after they pass (Malkawi).
· The fourth feature of Islamic finance that makes it stand apart from conventional, western finance is the understanding that money is not a commodity. When buying and selling products either on the street or through a business contract, money does not change hands until the item being purchased is physically present. In other words, farmers or car producers cannot sell their produce or merchandise until the goods have reached the intended consumer (Malkawi). This requirement is related to risk (the previous feature of Islamic finance). The demand for payment at delivery helps to reduce any unforeseen price fluctuations between the onset of a contract and the final delivery of the product under contract. The immediate exchange of goods for payment also shields the buyer from any problems that may arise for the seller during production that may delay or interrupt the ability for final delivery.
· The last major requirement for a financial institution to be considered ‘Shari’a complaint’ is that contracts provided by these institutions share the risks and rewards of the contract evenly between all parties involved (Ali). This idea is again in contrast with the western world’s idea of contracts and profits in the financial sector. In the west, the finance is a zero sum game: for every person that earns a positive return or profit from their investment, that profit comes from someone else’s loss. Often in Islamic contracts, there will be an equal distribution of positive return among all parties, but losses will be reserved for those most heavily invested financially. Those parties contributing technical knowledge or other non-monetary support are not subject to the loss of an investment if there is one.
In short, halal compliant investments are prohibited from profiting off debt, so bonds are off the table. Speculation and derivatives trading are also off limits. Additionally, halal investing prohibits businesses that profit off certain activities including alcohol, tobacco, narcotics, gambling, pork, sex and weapons, among others.
Halal investment funds have ROI which are in line with other all-equities funds, since they are not allowed to have a bond or fixed income component, making them moderately risky. Separately, the adoption of halal investing is getting popular in the general secular community as many consider the investment to be based on good social values, irrespective of whether one is practicing Islam. This is analogous to those preferring to eating kosher food for non-religious reasons which also explains why Hebrew National Frankfurters and Empire Chicken are doing well as they cater just as much to gentiles.
What about cryptocurrencies? Do they meet halal or are they considered haram, the opposite of halal and whose meaning translate to “forbidden”. This is open to interpretation and currently there is no definitive answer. Many experts are saying that since Bitcoin is built on an iron-clad distributed ledger system, it is actually more halal than common fiats, including the US dollar, since they are based on fractional reserves.
Another interpretation on cryptocurrencies is that since there are valid and legitimate technology behind cryptocurrencies, e.g., blockchain and cryptography, the technology play in itself would deem crypto’s as halal.
How do I invest in a halal-compliant way?
Fully about one fourth of the world’s population are Muslim, or practitioners of the Islam faith which amounts to about 1.9 billion people with an estimated Islamic financial assets of over $2.8 trillion in 2019.
The good news is that halal investing is much easier now as it is really starting to come into its own. Great Britain is the only non-Muslim country with a high level of Islamic financial institutions assets (six) and many traditional banks have specialized Islamic service units. Obviously this market is still underserved in non-Muslim countries. Another way would be to buy into halal investment funds which would give you good assurances. There are even halal trading bots which can be configured to meet different investment strategies — all of which will meet or exceed halal compliance.
In the meantime, QuantDART is currently developing a variety of halal complaint funds and investment advisory along with adding halal investment bots to round out our offerings of post-quantum, cryptographically hardened wallets and custody. The funds, the advisory, and the algorithms behind the trading bots will be approved in conjunction with Islamic Finance authorities in order to insure that we are conforming to our social responsibilities (QuantDART also has a considerable charity arm) as well as meeting market demands. Stay tuned as this subject areas evolves and takes on greater significance.
Edward Wong is a Co-Founder at QuantDART, a crypto custody, wallet, investment funds, advisory, and exchange startup. Edward is the Original Co-founder of the Shanghai Futures Exchange and was the former Treasury Architect at the Federal Reserve. Besides being a Fedophile he is a World Champion Spicy Eater and a cat lady.
