7 Islamic Investment Principles You Must Know

7 Islamic Investment Principles You Must Know

Islamic investment can also be called as shariah investment or halal investment. Whatever you call it, it can be defined as a financial product deemed adherent to shariah. Simply, we can say that it is an activity of investing funds or also doing transaction which is compliant with Islamic law. Of course, Islamic investment is different from other conventional investments. So, it is essential to know about Islamic investment principles.

What Are the Principles of Islamic Investment?

As we know, Islam is prohibiting usury (riba). Unfortunately, most investments contain this forbidden thing. If you are a Muslim and you want to make an investment, of course, you will be confused. Here, Islamic financing comes as a solution. If you’re going to invest without doing the prohibited activity, you have to know clearly about shariah investment principles. We will discuss it further below:

1. Halal

The first principle that you have to know about Islamic investment is halal. Halal means lawful. This principle means that there is nothing that contains haram or forbidden elements. For example, Alcohol, pig, & blood are haram. So, the investment must be free from these things. There are still many other things that are haram or prohibited by Islamic law. Islam also prohibits swap, gambling, and usury. So, a Muslim investor is not permitted to invest their money to the financial instruments that contain swap, gambling, or riba (interest).

Halal Investment
Halal Investment

2. Beneficial

The second principle that you have to know in about Islamic investment is that the investment must be beneficial. A Muslim investor must only invest his or her money to a beneficial investment. It aims to see the percentage result of the benefits for the investor and the fund manager in the financial instrument. As we all know, Islam prohibits something redundant and useless. So, before you decide to make an investment, you have to make sure that it has benefits for both parties.

3. Free from Riba

Quran is clearly stating that riba is prohibited. So, one of the halal investment principles is free from riba. There are many forms of riba, and today, we can find different types of investment that contain riba. So, if you want to invest your money, make sure that it is free from riba. Today, many shariah based financial instruments let you invest safely based on Islamic law. Here, there is no interest from the benefits of investment. Even though it is only in a small amount, riba still belongs to big sins. Therefore, every Moslem has to keep away from it.

4. Fair

Being fair also belongs to one of the Islamic investment principles. In sharing the benefits of the investment, it must be fair for both parties: investor and fund manager. So, there is no party that is harmed. For your information, the key to Islamic investment is profit sharing. Thus, the benefits of the investment are shared with both parties equitably. In Islam, every Moslem has to be fair in any situation and condition, including in case of finance. If the profit-sharing is not fair, it means you do not follow Islamic law.

5. Contract

The next principle is about the contract. The contract is essential in Islamic investment. In this case, there must be freedom to make a contract based on the agreement of both parties. Besides that, both parties also must be able to meet the contract. The arrangement makes everything clear so that there is no misunderstanding between 2 parties. Therefore, before you invest your money, make sure that there is an explicit contract between you as the investor and the one who manage your fund invested. In case of Islamic investment, we call it as contract of investment

6. Ethics

Ethics also belong to the principles of Islamic investment. Ethics is very important in everything, including financing. When it comes to Islamic investment, you have to make sure that the investment is made with Islamic ethics. It means, the agreement must follow Islamic rules, and the transaction should be done accordance rightly to Islam. Also, the fund manager has to follow Islamic law, and the profit-sharing must be based on Islamic laws, too. With good ethics, the profits of the investment will be blessed by God.

7. Documentation

The last one is the documentation. It is considered as one of the essential Islamic investment principles. Even though there has been a contract, documentation is still needed. As we know, there are two kinds of agreement. The first is a spoken contract, and the second one is a written contract.

Documentation is One of The Islamic Investment Principles
Documentation is One of The Islamic Investment Principles

In the case of halal investment, what you need is a written contract as the documentation in the transaction. There may be some documents required. Make sure that everything is documented as clear as possible.

What to Pay Attention to Islamic Investment Principles

According to the principles of Islamic shariah investment, some commerce activities are prohibited by Islam.

a. Haram Because of the Characteristics of the Traded Goods

According to Islamic laws, you are not allowed to make a transaction of trading with the products that contain something haram. It includes such as dead animals, blood, khamr or particular alcohol, and pig.

b. Haram Because of the Way of the Trading

Even though the products traded are halal, it can be haram if they are traded with the haram ways. It includes such as bay najash, ikhtikar, taghrir, riba and tadlis.

c. Haram Because of the Invalid Contract

We have to avoid transaction with an invalid contract so that Islamic laws prohibit it. In fact, the contract is the base of a transaction. A contract is considered invalid if it does not meet the requirements.

After understanding about halal investment principles, now you can decide to invest. There are two types of investment. The first is an investment in real goods such as jewellery, properties and arts as we can see the form of the goods. The second one is an investment in the documents of securities such as deposits and shares. You can choose your desired investment.

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