Money, Wealth & Charity -- An Islamic Perspective

In Islam, money is viewed as a tool or resource to benefit oneself, one's family, and society. However, it is also recognised that the love of money and material possessions can lead to greed and selfishness, which are seen as harmful to one's spiritual well-being. Therefore, a balanced approach is recommended.

To achieve this balance, one is encouraged to put in the effort to travel and earn; there is an implicit acknowledgement that some people will grow their wealth. And for this reason, they should share their wealth through charity, which is considered a loan to Allah (Surah Al-Hadid, verse 18). 

This forms the base of the money philosophy in Islam. Investing from an Islamic perspective involves following certain principles and guidelines based on Islamic law. These principles are designed to ensure that investments are made in a socially responsible and ethical manner.

First Principles

One of the key principles of Islamic investing is that investments must be made in businesses or industries that are considered halal (permissible) according to Islamic law. This means that investments must not involve any activities deemed haram (prohibited), such as gambling, alcohol, weapons manufacturing businesses or other prohibited substances, or any businesses that engage in unethical practices, such as fraud or exploitation.

Another important principle is the prohibition of interest-based transactions (riba). This means that any investment that involves earning or engaging in interest-based lending is not permissible in Islam. Instead, investors are encouraged to seek out investments based on profit-sharing models, where the returns are based on the profits the business earns.

In addition, Islamic investing principles require that investments are made in a socially responsible manner, with a focus on promoting positive social and environmental outcomes. This means that investors should consider the impact of their investments on society and the environment and should seek out businesses that are engaged in socially beneficial activities, such as providing jobs, supporting education, or promoting sustainability.

Overall, Islamic investing is a way of making investments consistent with Islamic principles and values and promoting ethical and socially responsible business practices. By adhering to these principles, investors can help to build a more sustainable and just economy while also earning returns on their investments.

Now, let us look in detail at the options of investing and giving. 

PART 1

How Can Muslims Invest?

Regarding asset classes, one can invest in equity, i.e. common stocks that are traded, gold and land or in mutual funds that invest in these asset classes correctly.  

Futures, Forwards and Options: 

• Generally, the majority opinion is that it is not allowed. 
• There is a minority opinion that these types of contacts are permitted under the condition that forward, futures and options are only valid when both parties agree on the stipulated duration and price, with no uncertainty in the transaction. 
• Then there is another minority opinion, which states that it is allowed only to hedge the portfolio, but trading or a naked position is not allowed. 

PART 2

There are different standards followed by Shariah boards. All scholars agree that businesses that are into non-halal activities cannot be invested in, i.e. banks, interest-based lending companies, insurance companies, alcohol companies, gambling/pornography companies, media & entertainment companies, tobacco, hotels, weapons manufacturing companies and companies that support them. 

In the second step, all the Shariah boards look into financial ratios and have developed their own screening criteria. Below is a table comparing them on similar financial parameters: 

Understanding the Methodology At a Glance

For a detailed study of the screening criteria - click here.

PART 3

Since all this is complicated, what should we do as individuals? 

There are five possible options, and they all have merit,. A simple way of assessment is to choose the path that you find more convincing, and it keeps your heart in a state of contentment. One thing you must not do is keep switching across them to maximise gains. 

1. Ask a Sharia expert from your area and your financial advisor to discuss and create a custom-made investment policy for you and review it every 3-5 years. 
2. Use one of the above methodologies to screen the stocks, as each has a shariah board and scholars supporting it; they are valid. Make it a habit to review their website and mirror their screening methodology. So that when they update any part of the process on their website, your method is also updated.
3. Purchase stock screening services from companies like Islamicly. Or you can mail Tasis to services@tasis.in and ask them. (Many years ago, they used to charge annually and send you a monthly list of approved stocks.)
4. You can go on a screener. In and follow my screen --  click here (This is absolutely free). 
5. Or mail me shoaib. zaman[at]foolishgenerous[dot]com and I will help you create a framework to approach money in a halal way. 

PART 4

When we benefit from society, we should also give it back. That would be a simplistic argument in favour of why to give Zakat. You can also take the religious answer that it has been commanded by Allah.

There are a few great resources on the subject that you can read if you are interested in the details. 

• Wikipedia - It covers the Sunni methodology (https://en.wikipedia.org/wiki/Zakat)
• The five schools of Islamic Law - It's an easy comparative between the five major schools (https://www.al-islam.org/printpdf/book/export/html/42705)
• Compilation of all the major Hadith on Zakat in Sahih Muslim (https://www.iium.edu.my/deed/hadith/muslim/005_smt.html)  
• Fiqh of estimation in calculating Zakah - A book on the subject of Zakah from Kingdom of Saudia Arabia (https://www.iium.edu.my/deed/hadith/muslim/005_smt.html)
• For a Shia view on Zakat, this is one of the best articles to read up (https://www.al-islam.org/articles/zakat-shia-fiqh-sayyid-muhammad-rizvi)
• 
  

How much to give?

The minimum amount that we should give as Zakat would be as follows. 

• On all non-yielding and non-consumable assets (like gold or land that is not used in any way for any purpose): 2.5% of the value as of date if held for a year. 
• For yielding assets or generating profits from the sale of natural resources like water, air-waves, minerals or crops, it is 10% of the Sales Value. (as the underlying product is nature's gift)
• For a business that requires hard effort, such as engineering, capital goods, manufacturing, patents, and so on, it should be 5% of profit or 2.5% of stock in trade.

So, in modern parlance, for shareholders, it would be 5%-10% of the Profit, depending on the business.

Landowners will have to decide how they treat their land, as it can fall under either of the three methods depending on the intentions and how it is used. It is best to take help from a subject matter and then decide on the calculation methodology.

Who to give? 

The Quran explicitly mentions who we should give Zakat to. 

Indeed, [prescribed] charitable offerings are only [to be given] to the (1) poor and (2) the indigent, and (3) to those who work on [administering] it, and (4) to those whose hearts are to be reconciled, and to (5) [free] those in bondage, and (6) to the debt-ridden, and (7) for the cause of God, and to (8) the wayfarer. [This is] an obligation from God. And God is all-knowing, all-wise. - Al-Tawbah, 9:60

(These insertions are to make it easy to read) 

While the details can be read in the above link, a short help to decide on who to give Zakat can also be as follows. 

• Helping the Poor (the way to define poor would be those whose net worth is less than the value of 595grams of Silver or 85grams of gold, the lower of the two values) 
• Assisting with the education of children from economically weaker families
• Assisting the medical needs of economically weaker families
• Helping the Needy 
• Helping the old, i.e. 60+, who cannot earn and do not have the means to survive.
• Helping the widow who does not have a source of income.  
• Helping orphaned children who may get exploited if not supported
• Rehabilitating those who have to beg for circumstances beyond their control 
• Free slaves -- Modern equivalent would be as follows
• Education support for families with assets less than 80g of gold or 500g of Silver or equivalent wealth in any form 
• supporting NGOs registered with the central government and have a reputation for taking action against human/child trafficking
• Donating to the govt/UN/Private NGOs working for refugees globally and/or helping with legal fees of people in jail for lack of money to pay fines. 
• People who have become bankrupt need help getting back on their feet.

My approach to Zakat is, 'On the day of judgement, our deeds show that we gave less zakat than what we should have given by a small %age because of wrong calculation methodology or in our zeal for becoming rich and hence may not get the entry into heaven -- Is that savings worth it?.' 

I hope this helps. These are based on my understanding, and Allah knows best.

Disclaimer: Shoaib Zaman is a CFP and has completed all Ethica Institute of Islamic Finance certifications. All views are personal.

June 2023 - Shariah Compliant Mutual Funds

Mutual Funds in India in May 2023, which have shariah compliant portfolio. 

Guest Author: Real estate vs Equity— Which will give better returns in the long term?

Stocks and real estate are the two most popular asset classes for long-term investments since they both assist in creating long-term returns to become financially prosperous. Although there are significant differences between these asset classes, it's important to remember that real estate can be an excellent alternative to stocks due to its lower risk, higher returns, and a reasonable level of diversification. However, stocks have been shown to outperform more traditional investments like bank fixed deposits while also providing enough liquidity to buy and sell shares at any time, something that real estate investments do not.

An Overview in Real Estate vs Equity

 

Your financial status, risk tolerance, and investment goals all influence your decision to invest in various asset types. Let's instead have a quick discussion of the two asset types.

 

Meaning: Investing in real estate is buying, renting, and selling land or constructed housing units to generate wealth through consistent price appreciation when the property's value rises and rent collection, which can offer a regular stream of income. Additionally, investing in stocks entails buying and selling shares of companies, which entails earning returns and additional perks like dividends, bonus shares, stock splits, buybacks, and capital gains.

 

Risk: Investments in stocks and real estate are both influenced by market and economic conditions. However, there are concerns associated with real estate investments, including a lack of liquidity, the market's unpredictability, location and unforeseen property health. However, stock market investments also have price fluctuation, global cues, economic and market situations, interest rate risk, and inflation. In the stock market, short-term trading entails higher volatility than long-term investments.

 

Liquidity: Stock market investments have better liquidity than other investments since buying or selling shares at any moment is simple, regardless of the market situation. Technical analysis of the stock's chart pattern or fundamental analysis of the company's earnings can be used to buy or sell stocks. Technical chart patterns may be used to trade on a short-term or intraday basis, but fundamental analysis provides the company's long-term perspective. Contrarily, real estate assets are less liquid; as a result, it is more difficult to convert them into cash when selling a home or piece of land since a suitable buyer must be found, and registration and market value must be verified, among other things.

 

Cost: One must consider all expenses spent while possessing a property, including brokerage, stamp duty and registration fees, interest paid on money borrowed, maintenance and repair expenses, and municipal taxes, when determining return on investment or actual return. In contrast, no fees are associated with investing in the stock market. Thus all that is necessary is a demat account and a low initial deposit, which may be as little as Rs 10.

 

Taxation: You will be required to pay capital gain tax on the profit made after taking inflation and the indexed acquisition cost into account when you decide to sell your property. These gains can be categorised as either short-term or long-term gains. It is considered a short-term capital gain if you sell your land, house, or other property within 36 months (3 years) of buying it, and the amount of tax payable will depend on your income tax bracket. However, if you sell it after three years, it will be regarded as a long-term capital gain and taxed at 20%, plus a 3% cess with the added indexation benefit. Suppose listed equity shares are held for less than 12 months at the selling time. In that case, the gains are short-term capital gains (STCG) and are taxed at 15%, while capital gains from equity shares held for more than 12 months are subject to long-term capital gains (LTCG), which are taxed at 10% after an exemption of up to Rs. 1 lakh on all long-term capital gains in a fiscal year.

 

Conclusion

Here is where we will discuss the returns of the two asset types mentioned above. When invested over the long term, stocks and real estate are both known to yield acceptable returns. The returns over the past ten years have ranged from 370%, 100%, 140%, 320%, and 180% if we compare the stock prices of top real estate developers. However, according to the data of Magicbricks, the Residential Real Estate Prices in Gurgaon have risen from Rs 8000 to Rs 9150 per sq ft, the price in Mumbai has risen from Rs 3800 to Rs 7000 per sq ft, the price in Bangalore has risen from Rs 2630 to Rs 4750 per sq ft, and price in Chennai risen from Rs 7850 to Rs 10,950, the residential demand in Pune climbed by 9.5%.  91% of Pune homebuyers looked for multistory residences. 2BHK flats had the most demand (46%), followed by 3BHK and above units (40%)., representing a surge of 14%, 84%, 80% and 39%, respectively. These variations show how investments in real estate and the stock market performed in terms of returns over the past ten years, so one cannot anticipate exact returns from these asset classes over the long term. However, historically, real estate and stock market investments have been shown to have outperformed conventional investments like bank fixed deposits in terms of returns.

 

Authored by Gunjan Goel, Director,  Goel Ganga Developments

Detailed Financial Screening of various Sharia Boards

 Detailed Financial Screening of various Sharia Boards

• S&P Islamic Index (Global)
• Accounts Receivables / Market value of Equity (36 month average) < 49 %
• (Cash + Interest Bearing Securities) / Market value of Equity (36 month average) <33%
• (Non-permissible income other than interest income) / Revenue < 5%
• Debt / Market Value of Equity (36month average) < 33 %
  


• FTSE Islamic Index (Global)
  
  • Debt is less than 33.333% of total assets
  • Cash and interest bearing items are less than 33.333% of total assets
  • Accounts receivable and cash are less than 50% of total assets
  • Total interest and non-compliant activities income should not exceed 5% of total revenue.
    
    
• Shariah Advisory Council (SAC) of the Securities & Exchange Commission in Malaysia (Malaysia)
  They follow a two-tier screening: tier 1 is on business, and tier 2 is accounting measures.
  
  Tier 1: Business Activity Benchmarks
• The contribution of Shariah non-compliant activities to the Group revenue and Group profit before taxation of the company will be computed and compared against the relevant business activity benchmarks as follows:
  
  (i) The five-per cent benchmark: The five-per cent benchmark is applicable to the following businesses/activities:
• conventional banking and lending;
• conventional insurance;
• gambling; 
• liquor and liquor-related activities; 
• pork and pork-related activities; 
• non-halal food and beverages;
• Shariah non-compliant entertainment; 
• tobacco and tobacco-related activities;
• interest income from conventional accounts and instruments (including interest income awarded arising from a court judgement or arbitrator);
• dividends from Shariah non-compliant investments; and
• other activities deemed non-compliant according to Shariah principles as determined by the SAC.
• For the above-mentioned businesses/activities, the contribution of Shariah non-compliant businesses/activities to the Group revenue or Group profit before taxation of the company must be less than five per cent.

(ii) The 20-per cent benchmark: The 20-per cent benchmark is applicable to the following businesses/activities:

• share trading;
• stockbroking business; 
• rental received from Shariah non-compliant activities; and
• other activities deemed non-compliant according to Shariah principles as determined by the SAC.
• For the above-mentioned businesses/activities, the contribution of Shariah non-compliant businesses/activities to the Group revenue or Group profit before taxation of the company must be less than 20 per cent.

Tier 2: Financial Ratios

• Financial Ratio Benchmarks: For the financial ratio benchmarks, the SAC takes into account the following financial ratios to measure riba and riba-based elements within a company’s statements of financial position:
1. (Cash over total assets) <33%
   Cash only includes cash placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments is excluded from the calculation.
2. (Debt over total assets) <33%
   Debt only includes interest-bearing debt, whereas Islamic financing or sukuk is excluded from the calculation.

• In addition to the above two-tier quantitative criteria, the SAC also considers qualitative aspect, which involves public perception or image of the company’s activities from the perspective of Islamic teaching.

• Accounting and Auditing Organization for Islamic Financial Institutions (Global)
• The corporation does not state in its memorandum of association that one of its objectives is to deal with prohibited goods or materials as per Islamic principles. 
• Total debt (long-term or short-term debt) is less than 30% of the market capitalisation
• That the total amount of interest-taking deposits, whether short-, medium- or long-term, shall not exceed 30% of the short-, medium- or long-term, shall not exceed 30% of the market capitalisation of total equity. 
• The income generated from the prohibited component does not exceed 5% of the total income. 

• Tasis (India): Since their screening methodology is proprietary, it is not clearly established. By reading their paper, the idea is easy to follow. 
• Total debt (long-term or short-term debt) should be less than 10% of total assets.* (Note: For Nifty Sharia Index, where Tasis is the advisor, Interest based-debt should be less than or equal to 25% of Total Assets.)
• Interest income should be less than or equal to 3% of the total income.
• Receivables plus cash and bank balances should be less than or equal to 90% of Total Assets.

*As per our understanding of their presentation. Earlier, their methodology was industry-specific; depending on the industry type, the debt level was adjusted  

One Line Summary of Warren Buffet's Letter to Shareholders

 ChatGPT summarises the essence of Buffett’s Letter for each year.

• 1977: In his first letter to shareholders, Buffett discusses the concept of "owner earnings" and highlights the importance of measuring a company's ability to generate cash over the long term.
• 1978: Discusses the importance of reinvesting earnings into the business and avoiding excessive debt.
• 1979: Buffett focuses on the challenges of investing in inflationary times and highlights the importance of owning productive assets that can increase in value alongside inflation.
• 1980: The idea of "economic goodwill" is highlighted and how it contributes to a company's long-term success.
• 1981: Buffett emphasises the importance of understanding a company's underlying business model before investing and cautions against relying too heavily on stock market predictions.
• 1982: In this year, he discusses the benefits of long-term investing and cautions against making hasty investment decisions.
• 1983: Buffett emphasises the importance of maintaining a long-term focus and avoiding short-term market fluctuations.
• 1984: Buffett discusses the challenges of investing in an increasingly competitive market and highlights the importance of focusing on businesses with strong competitive advantages.
• 1985: Buffett discusses the benefits of owning shares in companies with strong earnings growth potential and highlights the importance of diversification.
• 1986: Buffett emphasises the importance of avoiding overpaying for stocks and highlights the potential benefits of investing in companies that are temporarily out of favor.
• 1987: Buffett discusses the risks of investing in highly-leveraged companies and highlights the importance of avoiding excessive debt.
• 1988: Buffett discusses the benefits of investing in businesses that require little additional capital to grow and highlights the importance of focusing on a company's underlying business fundamentals.
• 1989: Buffett emphasises the importance of avoiding overconfidence and sticking to a long-term investment strategy.
• 1990: Buffett discusses the risks of investing in highly-leveraged companies and highlights the importance of focusing on businesses with strong competitive advantages.
• 1991: Buffett discusses the challenges of investing in a rapidly-changing economy and highlights the importance of adaptability.
• 1992: Buffett discusses the importance of investing in businesses with strong economic moats and highlights the potential benefits of investing in undervalued stocks.
• 1993: Buffett discusses the risks of investing in companies with complex business models and highlights the importance of simplicity.
• 1994: Buffett emphasises the importance of maintaining a long-term investment strategy and avoiding short-term market fluctuations.
• 1995: Buffett discusses the importance of solid brand-name businesses and highlights the potential benefits of investing in emerging markets.
• 1996: Buffett discusses the challenges of investing in a rapidly changing technological landscape and highlights the importance of investing in businesses with strong competitive advantages.
• 1997: Buffett discusses the importance of avoiding excessive risk and cautions against making hasty decisions.
• 1998: Buffett emphasises the importance of investing in businesses with strong economic moats and highlights the potential benefits of investing in international markets.
• 1999: Buffett discusses the risks of investing in companies with overinflated stock prices and highlights the importance of maintaining a long-term investment horizon.
• 2000: Buffett discusses the challenges of investing in a rapidly changing technological landscape and cautions against relying too heavily on stock market predictions.
• 2001: Buffett emphasises the importance of investing in businesses with strong competitive advantages and highlights the potential benefits of investing in undervalued stocks.
• 2002: Buffett discusses the benefits of investing in businesses with strong economic moats and highlights the potential risks of investing in highly leveraged companies.
• 2003: Buffett discusses the importance of maintaining a long-term investment horizon and avoiding emphasises market fluctuations.
• 2004: Buffett emphasises the importance of avoiding excessive fees and costs and highlights the benefits of investing in companies with strong earnings growth potential.
• 2005: Buffett discusses the challenges of investing in a market with high valuations and highlights the importance of focusing on a company's business fundamentals.
• 2006: Buffett emphasizes the importance of investing in businesses with strong economic moats and highlights the potential benefits of investing in emerging markets.
• 2007: Buffett discusses the risks of investing in companies with excessive debt and highlights the benefits of investing in businesses with strong earnings growth potential.
• 2008: Buffett discusses the global financial crisis and highlights the importance of avoiding excessive risk in investing.
• 2009: Buffett discusses the importance of maintaining a long-term investment horizon and emphasises short-term market fluctuations.
• 2010: Buffett emphasizes the importance of investing in businesses with strong economic moats and highlights the potential benefits of investing in undervalued stocks.
• 2011: substantial discusses the importance of investing in businesses with strong competitive advantages and highlights the potential risks of investing in rapidly changing technological landscapes.
• 2012: Buffett discusses the risks of investing in companies with complex financial structures and highlights the benefits of investing in businesses with simple, understandable business models.
• 2013: Buffett emphasises the importance of maintaining a long-term investment horizon and avoiding short-term market fluctuations.
• 2014: Buffett discusses the potential risks of investing in businesses with high debt substantial and highlights the importance of investing in businesses with strong competitive advantages.
• 2015: Buffett discusses the importance of investing in businesses with strong economic moats and highlights the potential benefits of investing in emerging markets.
• 2016: Buffett emphasises the importance of avoiding excessive fees and highlights the potential benefits of investing in businesses with strong earnings growth potential.
• 2017: Buffett discusses the potential risks of investing in rapidly changing technological landscapes and highlights the importance of investing in businesses with substantial competitive advantages.
• 2018: Buffett emphasises the importance of maintaining a long-term investment horizon and avoiding short-term market fluctuations.
• 2019: Buffett discusses the importance of investing in businesses with strong economic moats and highlights the potential benefits of investing in undervalued stocks.
• 2020 emphasises discusses the impact of the COVID-19 pandemic on the global economy and emphasizes the importance of maintaining a long-term investment horizon.
• 2021: Buffett discusses the performance of Berkshire Hathaway's investments during the pandemic and emphasises the importance of investing in businesses with substantial competitive advantages.