A halal investment is an investment that follows all guidelines defined in the Quran, the Islamic holy text. There are two main aspects of a halal investment. The first is that the investment must not generate interest. The company or industry in which one is investing also should be halal in its actions, restricting investment in some companies, such as those that make or sell alcohol. Beyond these guidelines, Muslims are free to invest in whatever manner desired.
The initial part of what makes a halal investment is that no interest can be earned on the money. This restriction is carefully spelled out in the Quran. Earning income from inaction is not permitted. Following this rule, profit sharing is allowed, because it is the result of hard work; interest earned on a savings account is not.
The interest restriction has led to a number of financial instruments that allow for a halal investment. One is a real estate investment trust (REIT). This is a way for a group of investors to put their money into a commercial property with the intention of developing it only for halal businesses. The investors put money into the development of the property, which is a halal investment, and then remove their money from the trust later and sell the land. The profit is garnered from rent paid by halal businesses.
Another halal investment is life insurance. There is some debate about whether it is truly halal, but certain types are generally accepted as permissible. One reason is because insurance given through an employer can be considered a grant. Another reason is because there is no certainty the insurance policy will ever be paid, so it is not truly a contract and, thus, is allowed.
The second portion of what constitutes a halal investment is that in no money can be earned in any way from forbidden, or haram, businesses. This means property cannot be rented to a haram business and that other types of investments, even if indirect, cannot profit from a forbidden industry. A haram business is one that violates Islamic sharia law, such as the production of alcohol, handling of haram animals or gambling. This rule applies to rent earned from a REIT and investments that might underpin a life insurance policy.
Several investment companies that strictly follow sharia law have successfully emerged and actively work with special financial considerations from larger banks that do not follow sharia. These institutions have successfully integrated halal investment strategies while still making a profit. They are responsible for developing and selling several REIT properties around the world.