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.