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Investment Payouts: An Easy Way to Tell Halal From Haram

by Rakaan Kayali

September 14, 2023
2 min read

Table of Contents

Disclaimer: This post is for informational and educational purposes only, not financial or investment advice. The opinions are solely those of the author, not any organization. Consult a professional before making investment decisions, as all investments carry risk. The author is not liable for losses or damages resulting from the use of this information. Past performance does not predict future results.

There is a very straightforward method to determine if a particular investment payouts is halal or haram.

Investment Payouts: An Easy Way to Tell Halal From Haram

Simply ask:

Are the investors’ returns a function of how much they invested or are they a function of how much profit the investment generates?

If the investors' returns are a function of how much they invested, this is Haram (prohibited in Islam).

On the other hand, if the investors' returns are a function of how much profit the investment generates, this is Halal (permissible in Islam).

Consider the following two investments:

Investment AInvestment B
Offers a 10% annual return on investment. Offers 10% of investment profits
Investment A payout = 10% X Investment AmountInvestor B payout = 10% X Investment Profits (if they exist)
Investment A payout is a function of Investment AmountInvestment B payout is a function of Investment Profits

Investment A's payout arrangement is prohibited in Islam whereas Investment B’s payout is permissible.

Why is this? Why is it that Islam prohibits investments where the payout is independent of the outcome and allows investments where the payout is outcome-based?

The reason is that when investor payout is independent of the outcome, the investor is not incentivized to care about the outcome.

Consequently, things that make no sense to finance end up getting financed if the financier thinks the financed will be able to make their payments, however painful this may be for the financed.

Or the financier expects the financed will default and has their eye on the collateral they will gain ownership of.

Recall the 2008 financial crisis. Banks started lending unqualified borrowers to buy homes, in hopes of foreclosing on the purchased homes and selling them at a profit.

The flip side to this equation is when the purchased home becomes worth less than the amount borrowed to purchase the home. In this case, the borrower has the incentive to walk away from their obligations and leave their lender with a loss.

As of June 30, 2018, nearly one in 10 American homes with mortgages were "seriously" underwater, according to Irvine, California-based ATTOM Data Solutions, meaning that their market values were at least 25 percent lower than the balance remaining on their mortgages.

In an Islamic investment, the percentage of profits owed is fixed while the payout is variable.

In a non-Islamic investment, the percentage of profits owed is variable while the payout is fixed.

Accordingly, there is no such thing as an Islamic fixed income product.

Fixed income means the future payouts are predetermined. Since the future performance of anything cannot be guaranteed, fixed future payouts mean the payouts are independent of the performance of the underlying asset. As we pointed out, this is Haram (prohibited in Islam).

To check your investment payouts portfolio for Islamic compliance, start with making sure you have no investments in fixed income products, the most common type of which are bonds.

So the next time you are considering an investment, ask yourself: Is my payout predetermined or is it a function of how well the investment performs?

If the payout is performance-based, it is Halal (permissible in Islam).

If the payout is predetermined based on the amount invested, it is Haram (prohibited in Islam).

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Comments

11 responses to “Investment Payouts: An Easy Way to Tell Halal From Haram”

  1. Mahmoud Ahmad says:

    My 401-K offers a 4% match to what I put in. The 4% is based on my income.
    For example if I put in 100$ a month, by 12 months I would have put in 1,200$ , and the company will match it by 1,200$.
    Is this haram ?

  2. Mahmoud Ahmad says:

    Salam aleikom Rakan,
    The company I work for sells it’s stocks at 10% discount for its employees, offered 4 times a year. Is this haram? Basically i’ll Buy it for ....day 90$, and sell it for 100$ to the stock market.

  3. Walaykum Salam Mahmoud,
    No there is nothing haram. The same arguments I made for matching contributions apply here.

  4. Mahmoud Ahmad says:

    Salam brother Rakan,
    I would really like to know your thoughts on Wahed invest. One famous Muslim speaker/imam by name yasir qadhi is on the sharia law and an investor himself. for some reason it didn’t resonate well with me, but knowing this is more up your ally figured i’d ask you.
    Thank you.

    • Walaykum Salam brother Mahmoud,
      As a concept there is nothing wrong with what Wahed invest is doing. In fact, it's a good thing. I'm a fan of both index funds and ethical investing. My reservations relate to their use of "Islamic fixed-income products" (commonly referred to as "Sukuk") which are not Islamic (see my article on Sukuk) and in the fact that their screening of stocks for what is Halal relies on people who are employed by Wahed invest. This, to me, seems like a conflict of interest (see my article on fatwa shopping).
      InshAllah I have not said anything in error but this is my opinion based on the limited information I have related to their operations.

  5. Muhammad says:

    My bank is offering Mudarabah investment option. saying if you fix your deposit for 5 years you'll get x% profit on it and if for 7 years you will get Y % of profit. and in between they say that the profits may vary as well. pl let me know if that is haram or halal. I believe the % is on the invested amount but the profits may vary.
    https://www.scribd.com/doc/19488237/Meezan-Bank

    • contractually guaranteed profits are haram whether they are fixed or variable. The question to ask is if your bank is claiming a zero risk of loss. If so, it's hard to say how this would be different from a loan with a variable rate of interest.

  6. muneer says:

    For my RS 100000 (one lakh) investment in a MLM company (Longrich Technologies) they offering a return of RS 1800 to RS 2000 on a daily basis and the company claiming that our capital amount is 100% safe and in 200 working days your investment will be quadruple (4 times) and in 32 days i got 52000 already. Is it haram or halal.give me reply urgently because iam very much worried.

  7. Razak says:

    Two questions for you:
    1) If I seek for an investor in my business and tell them that their funds are 100% secure because if Business were to take any loss, I will sell my assets to return their funds. What i require them to do is invest X amount of money and in return I will give them fixed per-determined $ profits. Is this permissible?
    2) What are your thoughts on Faith Based Home financing loan, I am working with UIF and this is what they claim, link is also shared below:
    UIF offers three different alternative financing models called Musharaka (Partnership), Murabaha (Installment Sale), and Ijara (Lease to Own). In any one of these models, UIF buys the property and sells it to you and you pay UIF a profit for using the property. There is no interest involved. UIF is simply buying and selling a house to you.
    Is this Hallal?

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