04/06/2025
Halal Investing
Benefits and Risks of Halal Investing
Investing according to Islamic principles can offer many benefits to Muslims and non-Muslims alike. Halal investing encourages a disciplined investment process that promotes in-depth security research and monitoring. Generally, the low debt requirements of Islamic screens facilitate a conservative approach that appeals to risk-averse investors.
Halal investing discourages short-term speculation, and some Islamic scholars interpret high portfolio turnover rates (frequent trading) as a type of gambling. Low turnover minimizes portfolio trading expenses, such as broker commissions, while increasing tax efficiency by avoiding rapid buying and selling of securities that can generate taxable capital gains.
The limitations imposed on investment opportunities by Islamic principles potentially creates risk. For example, among the securities researched monthly by Saturna Capital for the Amana Funds, less than half pass the initial screens necessary to be considered halal. Restricting investment choices to a smaller universe means that a halal portfolio may not be as diversified as other portfolios, which may increase the risk of loss. The returns from various market sectors rise and fall at different times. Islamic principles may limit opportunities to gain when prohibited market sectors, such as financial services, rally.
Because Islamic principles preclude the use of interest-paying investments, halal cash reserves cannot be invested in traditional money market funds or deposited in an interest-earning bank account and therefore do not earn income.
