Investing in shares has always been lucrative as people seek to diversify their sources of income. However, selecting the best shares to invest in has always been a challenge to people. It even gets worse for those who are looking for Sharia-compliant investments. The good thing is that there are already some laid down principles that will guide you in this journey of searching for halal investment options. The following are some of the things that you should consider.
Type of business
Islamic finance is all about empowerment and eradication of poverty in the society. However, some businesses contribute to the moral decay of the make. Businesses such as those that sell alcoholic drinks, nightclubs and gambling ventures should be a no-gone zone if you are serious about halal investments.
Some businesses such as stock brokers, conventional banks and insurers are somehow tricky to analyze. Reason being that they charge interest and offer investments based on speculative terms. It is good to analyze such ventures on an individual basis rather than as a group. The best options should be those businesses that are already functional. You can see the assets and have a clear plan on how they intend to carry out their operations.
Income from investments
Even though a good number of businesses make profits, such businesses take an extra step and invest in other ventures to generate more income. The business could be halal but its sources of income could be questionable. A good example is an income from interest-based schemes. How should you treat this? Islamic scholars indicate that haram activities of the business should not exceed 33% of the total assets. The income from these haram activities should also not exceed 5% of the total revenue of the company. As an investor, you have to determine the profits gained from haram activities and give it to charity.
Loans has been one of the major ways of business financing and a good number of entrepreneurs head down this route. Islamic banking principles prohibit interest but most financiers will charge interest on the loans they advance to you. Analyze the debts of the company you want to invest in and ensure that the debt that bears interest does not exceed 33% of the total assets. The principle does not apply to Islamic finance but is applied by other smart investors.
Liquidity of the assets
There are some assets that can be converted to cash quickly while others take ages to convert. This depends on the type of business in question. Take for instance if you operate a healthcare clinic, converting your business car to cash instantly at the prevailing market value might be hard. However, a motor car distributor can convert a vehicle to cash without losing a dime. Illiquid assets should be more than 20%. The reason behind this is that you should treat money as a means of exchange and not a store of wealth. You are not allowed to sell liquid assets for more than their value according to the Sharia laws which makes illiquid assets the best store of wealth.
Screening for Sharia-compliant investments does not have to be hard if you follow the above tips. Seek help from experts in this field whenever you feel stuck to avoid investing in a venture that violates the principles of halal financing.