What Is The Difference Between Halal Investment And Ethical Investment?

In this article, we will elaborate on the difference between Halal Investment and Ethical Investment. So the question is ” What Is The Difference Between Halal Investment And Ethical Investment?”

Halal Investment

Halal investment, also known as shariah-compliant investment, entails investing in accordance with Islamic law’s principles. Shariah compliance requirements are extensive and have been a debate among theological and practitioner circles. However, there are three key ideas on which everyone agrees.

  • Avoiding Riba

Riba refers to profiting from loans or deposits, even if the interest charged is not higher than market rates. The general premise is that charging interest is equivalent to usury and results in inequitable resource exploitation.

Creditors with collateral and cash flow, for example, benefit from “unearned income,” whereas debtors must put in more effort to profit from these loans, resulting in inequitable profit distribution.

  • Avoiding Gharar

Gharar refers to excessively speculative transactions or transactions that go against the principles of corporate certainty and transparency. Futures, options, and forwards, among other derivative financial products, are outlawed. Maysir, in a similar spirit, refers to the acquiring of wealth through chance rather than work.

  • Avoid Haram Industries

Haram is the opposite of halal, and it refers to items that are forbidden by Islamic law. Military equipment, pig products, alcoholic beverages, gambling, and certain sections of the entertainment industry, such as adult entertainment, are examples of haram industries.

Ethical Investment

Ethical investing, on the other hand, is incorporating personal beliefs and societal concerns into financial decisions. It takes into account both the financial needs of the investor and the impact of the investment on society as a whole. Ethical investing selects and manages investment portfolios based on ethical and social factors. Investors are concerned not only with the financial returns on their portfolios and the risks they face but also with the qualities of the companies in which they invest. The nature of the company’s goods or services, its location, and the way it conducts its affairs and business operations are all factors to consider.

The Difference Between Halal Investment And Ethical Investment

The main difference between Islamic Investment and Ethical Investment, beside excluding certain sectors (such as companies that produce alcoholic beverages, gambling, and so forth), is that Islamic funds do not deal with the fixed income market and the interest payment.

Screening Process

Ethical investment uses a screening method to guarantee that the businesses in which they invest are ethical. The screening procedure eliminates enterprises that are seen to be bad, encouraging investment in positive businesses. Some sorts of investments, such as gambling enterprises or weapon manufacturers, are excluded from the negative screening. Positive screening, on the other hand, favors activities or features that are good, such as renewable energy and health care. Some fund managers also apply a formula known as the “best of sector,” which selects the top companies in each industry based on their social and environmental commitment.

On the other hand, to claim that the investment is halal, the Shariah screening procedures should take place. Shariah-compliant screening process generally compiled of two stages:

  1. Operational Screening
  2. Financial Screening
Operational Screening:

Investments in any company engaged in haram activities are impermissible. Below is a list of prohibited business activities:

  • Interest-based products, services, and instruments.
  • The manufacture or distribution of alcohol products
  • The manufacture or distribution of arms and weapons
  • Gaming or gambling
  • Any conventional assurance-related activity
  • The production, packaging, processing, or any other activity relating to pork or pork products and other non-Halal meat
  • The production or distribution of pornographic material
  • Any other activities not permissible under Shariah as determined by the respective Shariah boards
Finacial screening

Four components must be screened before claiming it Shariah-compliant,

  1. Impure income earned through “interest” or other suspect earnings
  2. Cash and debt compared to Total Assets or Average Market Capital
  3. Debt compared to Equity or Average Market Capitalization
  4. Account Receivables

Although Halal investment is also an ethical investment, both have different paths. Halal investment should adhere with the Shariah principles and as a result, it promote justice and economic stability. Whereas ethical investment, only engage with ethical business activities that do not harm the society and environment, but do not bother the Shariah rules. Therefore, when you invest in a halal way, you are having two goals with one deed.

To ensure that you are investing in a halal stock, please feel free to sign up for our free stock screening services at musaffa.com.

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