What is halal investment in Islam and why is it growing?

The global halal economy is rising, and growing demand is creating more opportunities for Sharia-compliant investment.

According to experts, the market value of the global Islamic halal economy will reach 7.7 trillion dollars by 2025. This is twice the 3.2 trillion dollars achieved in 2015 and significantly higher than the 5.7 trillion dollars calculated less than three years ago, in 2021.

A report released last year by the General Council for Islamic Banks and Financial Institutions states that the global Islamic funds market has grown by more than 300 percent over the past decade and that approximately 200 billion dollars is now managed globally.

Statistical data show growing demand for both halal and "Sharia-compliant" investments and opportunities.

Investing is permitted in Islam, but certain aspects of investment activity - for example, charging or paying interest - are not permitted. Traditionally, this was a problem, a missed opportunity, for Muslim savers and investors in the past.

What is halal investment?

Halal is an Arabic term meaning "permitted", and it stipulates that:

• Transactions may not involve "riba" (interest).
• Investments must not be made in "haram" (unlawful) assets or goods, such as pork products, alcoholic drinks or military equipment, among others.
• Investment activity must not contain a high level of "Gharar". "Gharar" is an Arabic term used to describe transactions with a high level of uncertainty, or transactions in business that run contrary to the principles of certainty and transparency.

Omar Shaikh, director of the UK Islamic Finance Council (UKIFC), told Al Jazeera that "Halal investment is managing your money and finances in line with your faith. Muslims believe that earning money in a halal way is better than earning it in a way that is harmful to society and contrary to the morality of the religion (even if it is more)".

Ethis Islamic finance group co-founder and chief executive Umar Munshi says that Sharia compliance is important, but institutions and investors seeking ethical investments should go a step further and make sure a business is entirely ethical.

"A business's activity should not have a negative impact on society or the environment," Munshi says. "That is, merely being Sharia compliant is not enough; it must also not cause negative effects. For example, investing in a tobacco company may be Sharia compliant, but it is not suitable for society, that is, it is not considered ethical investment."

How does halal investment work?

One example of halal investment is Islamic business financing. This model uses new financial instruments such as profit sharing, Sharia-compliant insurance and sukuk. A sukuk is an Islamic financial certificate that represents an ownership share in a particular business.

Unlike conventional bonds - that is, a debt instrument that an investor buys in order to earn interest income - sukuk holders become partners in a certain part of the business and, over time, receive a share of the profit generated by that business. Applying profit sharing instead of interest ensures that transactions remain in line with Sharia principles.

According to Shaikh of the UK Islamic Finance Council (UKIFC):

"The Islamic finance sector has a history of only 30 years, and the main development has taken place in the last 15 years. Education and awareness-building take time. As this happens, more banks focus on meeting the demand for halal investment. This in turn leads to the creation of more products and, as a result, the formation of more demand."

Why is halal investment becoming increasingly popular?

A report published by Goldman Sachs in December 2022 forecasts that by 2075, in five of the world's 10 largest economies - India, Indonesia, Nigeria, Pakistan and Egypt - the Muslim population will exceed 850 million.

As the population grows, demand for financial products also grows. According to the research group DinarStandard's State of the Global Islamic Economy Report published in 2023, 25.9 billion dollars was invested in Sharia-compliant investments in the 2022-2023 financial year, which represents a 128 percent increase year on year.

Siddiq Farid, co-founder of SmartCrowd, a Dubai-based real estate investment platform, said on this:

"Overall, halal investment is on the rise. People are now better educated, and they are also more aware of how their money affects the global socio-economic picture. They are also more cautious. This leads to a more ethical approach to investment, and halal investment is a key part of it. This trend is strengthening especially among the younger generation. The new generation is more socially aware. People clearly understand where their money is directed and how it is used."

The growth of halal investment opportunities and easy access to them are also among the factors driving increased demand.

Israel's war on Gaza and its effects

One of the factors that has recently given additional impetus to demand for halal investments is consumer boycott campaigns against brands that support Israel and its war in Gaza.

The loss of life of more than 32,000 Palestinians in Gaza as a result of Israel's attacks has had a serious effect on investors' mindset. According to Farid:

"The halal investment sector was already growing steadily, but over the last six months this growth has accelerated further. This is observed mainly among millennials and people under 40.

Previously, for these people the main question was simply a halal choice - that is, it should not be haram, and that is enough. Now a broader awareness has formed: not only whether it is halal, but also its alignment with values and faith has come to the fore. The boycott movements showed people that something can be halal, but that does not mean you must necessarily use it, have a connection with it or invest in it."

How has technology contributed to the rise of halal investment?

FinTech Magazine wrote in December last year that although Muslims make up almost a quarter of the world's population, only one percent of financial assets are Sharia compliant. Experts say this will change with the emergence of "fintech" financial technology, which could make investment more accessible for ordinary consumers and individual investors.

"Muslims' level of literacy on investment is generally low, and this is partly because of the limited options available to them. Even the most basic Sharia-compliant investment information often does not reach most of the Muslim population. Ibrahim Khan, co-founder of the online financial platform Islamic Finance Guru, said this in an interview with FinTech Magazine.

In addition, the rise of social media has also increased awareness of Sharia-compliant finance and led to noticeable development in this area. On the other hand, fintech has made halal investment opportunities even more accessible. This is because these services can now be used very conveniently and easily through a smartphone or laptop.

A study published this January by the consulting group McKinsey & Company showed that between 2023 and 2028, revenues in the fintech industry are expected to grow roughly three times faster than in the traditional banking sector.

Shaikh of the UK Islamic Finance Council (UKIFC) noted: "The phone is in most cases the device closest to a person. Fintechs start from exactly this paradigm and create solutions that are more efficient, increase transparency and give customers more choice. There is great dynamism in this area. Many banks are already developing fintech-based solutions or acquiring fintech companies."

Munshi added that one of the main advantages of fintechs is the age of the target audience:
"The younger generation is more open to online investment," he stressed. The company he leads operates as an online platform and community for alternative finance and investment opportunities.

According to the same McKinsey study, in the second half of the 2010s the fintech industry attracted record amounts of capital. Venture capital investment rose from 19.4 billion dollars in 2015 to 33.3 billion dollars in 2020, which represents an average annual growth of 17 percent.

The report also notes that, according to data as of July 2023, the total market capitalisation of exchange-listed fintech companies reached 550 billion dollars. This is twice the figure for 2019.

Source: Al Jazeera / Faras Ghani